When a company goes public, it lists its shares on the stock exchange for the first time through a process known as IPO (Initial Public Offering). In a similar fashion, when an asset management company launches a new mutual fund scheme, it does so through a process called NFO. Here we’re going to be exploring some common questions about NFO in mutual fund investments – From NFO full form and meaning to its types and advantages. Plus, we’ll also share some handy tips to help you decide if investing in an NFO is the right move for you!
What is NFO in Mutual Funds?
NFO stands for New Fund Offer. As an asset management company grows, it launches new mutual fund schemes to appeal to a wider variety of investors. They introduce new schemes based on different investment strategies, objectives, sectors, themes, or asset classes. To raise the capital required, AMCs launch an NFO, which gives investors the opportunity to buy the newly formed fund’s units at a low price, which is set at Rs. 10 per unit.
The NFO meaning in mutual funds can thus be understood as the initial launch period of a new fund where investors can buy units at the initial price. This initial launch period is regulated by SEBI and lasts somewhere between 10 to 30 days.
Here’s an example to help make things clear. Let’s say an AMC launches an NFO for a sectoral scheme, announcing that the subscription period for this new fund will last for 15 days. During this period, investors are allowed to buy the fund’s units at a fixed price of Rs. 10. This price of the units will not fluctuate during the subscription period. The AMC will use this time to accumulate the required capital from investors. Once the NFO period closes, the collected capital will be invested by the fund manager into a portfolio of securities aligned with the fund’s goals.
From this point onward, the NAV of the fund will start fluctuating based on the market performance of the underlying securities in the portfolio.
Now that you’ve learned what NFO is in mutual fund investing, let’s understand how it works.
How Does an NFO Work?
Before announcing the NFO, the fund house makes sure that its new scheme has the necessary approval from SEBI. These regulatory compliances are important to ensure that the investors are protected. Here’s how the rest of the process of NFO in mutual fund goes:
- The AMC announces the NFO to the public. The scheme information document is released, which includes all the necessary details to help investors understand what the fund is all about. It contains information about the fund’s objectives, investment strategy, type, category, subscription period, initial unit price (usually Rs. 10), fund manager, risk factors, and more.
- During the subscription period, investors are allowed to purchase units at the fixed initial price. This price does not fluctuate as long as the subscription period is active. There may be a minimum investment amount associated with the fund, however.
- After the subscription period ends, the fund manager begins to invest the pooled money in securities that align with the fund’s objectives and investment strategy.
- Now the fund is operational, so the price per unit of the fund can fluctuate based on the market performance of the portfolio’s underlying assets. It can go up or down, and the new investors wanting to invest in this scheme must buy units at the day’s prevailing NAV.
Types of New Fund Offers (NFOs)
There are three major types of NFO:
1. Open-Ended NFOs
Open-ended NFOs are mutual funds that stay open for investment even after the NFO period ends. Investors can not only buy units but are also allowed to redeem units at the prevailing NAV, which is calculated daily based on the fund’s performance. However, there may be an exit load if units are redeemed before a specific period has passed. Since investors can exit the scheme at any time, these NFOs are considered more flexible and liquid.
2. Close-Ended NFOs
On the other hand, close-ended funds offer much lower liquidity. The units of a close-ended NFO cannot be purchased after the NFO period has passed. These funds come with a maturity date, so the units cannot be redeemed prematurely either. However, the units of close-ended funds can be traded on the stock exchange, so they do offer some liquidity. Since the total number of units after the NFO period is limited, the market price of these units can differ from their NAV. On the stock exchange, they can trade at a discount or premium based on demand.
3. Interval NFOs
Interval NFOs combine the features of open and close-ended funds. The AMC defines intervals, such as annually or semi-annually, which are essentially windows where investors can buy or redeem units of the fund. Outside these intervals, the fund stays closed to any trading. These intervals differ from scheme to scheme and are mentioned in the scheme document.
Other than these, NFOs can be classified based on various other criteria such as:
- Investment objective – Income funds, growth funds, equity linked saving schemes (tax saver funds)
- Investment strategy – Actively or passively managed funds
- Underlying securities – Equity, debt, and hybrid funds
- Others – Index funds and ETFs.
Advantages of Investing in an NFO
Like any mutual fund, investing in an NFO gives investors many advantages, such as:
- Built-in diversification – Fund managers invest the pooled money in a basket of securities, which reduces risk.
- Professional management – Funds are handled by highly qualified individuals who bring years of experience and expertise to the table. Under them works a dedicated team of analysts, who conduct in-depth market research and analysis to identify the best investment opportunities.
- Accessibility – One can start investing in mutual funds with low minimum investment amounts, which makes them more affordable and accessible to a wider population.
When you invest in a scheme during the NFO period, you can buy units at a fixed price which will not fluctuate as long as the subscription period is active. Investing in close-ended funds can be particularly beneficial as they have a limited number of units, and may be traded at a premium on the stock exchange.
Also, usually when NFOs are announced, they offer investors the opportunity to invest in something new or innovative, like a fund focused on emerging sectors, thematic investing, or a unique investing strategy that not many managers in the market adopt. For investors looking to diversify their portfolio or wanting to gain exposure to a niche segment, NFOs can be an exciting opportunity to get in early.
Factors to Consider Before Investing in an NFO
As with any other investment, there are several important factors one should consider before investing in a new fund offer in mutual funds:
- First and foremost, investors should make sure that the NFO aligns with their financial goals, risk tolerance, and investment horizon. For example, an investor who prioritises liquidity shouldn’t consider investing in a close-ended NFO. Understand the fund’s objectives and risk levels.
- One of the most important aspects that inventors consider before investing in a mutual fund is the fund’s past performance. Since NFOs have no history, investors need to rely on other indicators, such as the AMC’s reputation. One can evaluate this by looking at the AMC’s assets under management, which indicates the scale and credibility of the AMC, and also the AMC’s historical performance across its other funds.
- AMCs provide information on the fund manager and their team in the scheme document. Investors should analyse the fund manager’s track record and understand how well they performed in their previous endeavours.
- Keep an eye on the market conditions during the NFO period. For example, if it’s a technology focused NFO, one should assess whether the tech sector is experiencing growth or facing challenges at the time.
- Some open-ended funds come with a lock-in period, which investors should be aware of to eliminate any liquidity concerns.
- While open-ended funds allow investors to redeem units at any time, some funds come with an exit load, which is a fee charged by the AMC if investors cash out before a specific period.
- The AMC also releases information on how much it expects the fund to return over the years. Investors should compare this figure with the returns of ongoing funds in the market within the same category.
How to Invest in an NFO
After you’ve researched the NFO and concluded it is suitable for your financial situation, you are ready to invest. There are mainly two ways you can invest in a new fund offer in mutual funds, with the first being through a distributor or broker. If you are choosing this option, make sure the broker is reliable and is registered with AMFI. The other way you can invest is through online platforms. If you don’t have an account you can easily make one and wait for the KYC process. Then, you can fill out and submit the NFO application, mentioning the SIP or lump sum amount.
Conclusion
NFO stands for New Fund Offer. When an AMC launches a new scheme, the NFO period remains open for a few weeks during which investors can buy the scheme’s units at a fixed rate. Before investing in an NFO in a mutual fund, investors should consider a number of factors, such as the fund’s goals, investment strategy, AMC’s reputation and AUM, and the fund manager’s track record. It is important for investors to make sure that the fund’s objectives and horizon match their own financial goals and risk tolerance.
A critical thing to remember about NFOs is that they have no past performance history, which is a major factor people consider before investing in existing mutual funds. The AMC provides estimated returns, but the risk associated with NFOs is still higher compared to ongoing funds in the same category on account of it being something new. Investors have to put a lot of faith in the AMC as well as the fund manager’s skills and thus the success of the investment largely depends on the experience and expertise of the management team. If a consistent fund of the same type and category already exists with an extensive performance history, it would likely be a better option to invest in the existing fund rather than the NFO.
Also, many investors completely equate NFOs with IPOs. While the two share many similarities, one significant difference is that NFOs can issue unlimited units, while IPOs issue limited stocks. After the initial period is over, stock prices can fluctuate greatly due to demand and supply dynamics, whereas the units of an open-ended fund remain unaffected by them. Their price depends on the performance of the fund’s underlying securities. There can be an advantage, however, of investing in close-ended NFOs as after the subscription period, the number of units is fixed. They can potentially be traded on the stock exchange, where demand and supply dynamics can influence the price, just like stocks.
Before you invest, you should consider consulting with a financial advisor, who can give you unbiased and personalised advice based on your unique financial situation. A financial advisor can help you assess different mutual funds and NFOs, and guide you in choosing the ones that align with your goals, risk tolerance, and investment horizon.
