What is NFO in mutual fund and how to invest in it?

A new fund offer (NFO) is a mutual fund scheme made available for investment for the first time by a mutual fund house or Asset Management Company (AMC). The aim of launching an NFO is to raise capital from the public to purchase securities (stocks or debt instruments) and pay for administrative tasks.

In other words, an NFO is a first-time opening of a subscription offer of a mutual fund scheme. An NFO usually lasts for 10 days and up to 15 days for all schemes except ELSS and allows investors to buy units of the scheme at face value which can be Rs. 10 per unit or Rs. 100 per unit or Rs. 100 per unit.

Types of New Funds Offer (NFO)

After having attained a grasp of NFOs, let’s take a closer look at their structural classification. Among the three types of NFO mutual funds – open-ended, close-ended, and interval plans – which one should you go in for? Let’s help you decide.

Open-ended NFOs

Open-ended funds are for investors who want to invest or redeem units at any point in time as there is no fixed maturity date. This means investors can buy or sell units at the scheme's prevailing net asset value (NAV) and get liquidity at any point in time. They can invest in these schemes either through SIP or lumpsum modes. In short, open-ended NFOs are ideal for investors seeking flexibility as they can enter or exit the scheme anytime.

Close-ended NFOs

Close-ended NFOs are launched for a fixed tenure only. Here, investors can buy or sell units only during the initial offer period. These funds are for those investors who want to invest for a specific period. For redemption, funds must be listed on the stock exchange first else investors will get the money at the scheme maturity. Also, close-ended NFOs do not permit SIP investments. Additionally, closed-ended funds come with a fixed tenure of around 5-7 years from the investment date.

Interval plans

Interval plans are a mix of open-ended and close-ended schemes. These NFOs allow investors to transact within a specified timeframe, usually annually or semi-annually. Thus, with interval plans, investors can purchase and redeem scheme units when the AMC allows. This is by way of having a Specified Transaction Period where the investors can either invest in the scheme or redeem from the scheme.

How does an NFO work?

NFOs are launched by mutual fund houses to raise money from investors before the scheme becomes available for trading. Here's how it works:

The mutual fund house announces a new mutual fund, detailing its objectives and the assets it will invest in. This marks the start of the NFO period.

During the NFO period, investors can buy fund units at a fixed price, typically starting from Rs. 10 per unit, which makes it an attractive investment opportunity.

The subscription period for NFOs usually lasts a few weeks. Investors can purchase fund units at the initial offer price during this time.

Once the subscription period ends, the NFO closes, and further investments cannot be made at the initial offer price.

After raising the required capital, the fund begins investing in various assets according to its investment objectives. Investors can then trade NFO fund units on the open market.

It's important to note that after the NFO period, the price of NFO units can fluctuate based on the fund's performance.

Benefits of investing in NFOs

Just like other ongoing schemes, the chief advantages of investing in an NFO are low initial investment and a chance to leverage future performance. Here are some more benefits:

Accessible

NFO units are offered at a face value and the units are allocated accordingly. These are accessible to investors who want to start off with a low initial investment. For example, if you are investing Rs. 10,000, you will be allocated 1,000 units in the NFO scheme with a face value of Rs. 10 each.

Flexibility

NFOs are handled by expert fund managers who make all fund related decisions. Thus, investors can be secure in the knowledge that their money is being handled in the best way possible. Open-ended NFOs

Diversification

NFOs can also help investors diversify their portfolio by including newer strategies. This way, you can potentially tap into a new avenue of returns, especially if your current investments are not performing.

Future growth

With effective management, NFOs can help you meet your financial goals by giving you a chance to capitalise from the fund’s potential growth over time. You can also invest in a specific sector if it has potential for future growth as and when an AMC launches that NFO.

Read Also: Benefits of investing in NFO Mutual Funds.

How do you invest in NFO?

You can invest in an NFO directly through the mutual fund house that has launched the scheme, a registered mutual fund distributor or a Registrar and Transfer Agent. You can also invest through intermediaries such registered investment advisors, aggregators or certain banks. You can invest both online and offline through these routes.

Things to keep in mind before investing in NFO

Before investing in a New Fund Offer (NFO), consider the following:

1. Investment objective: Ensure the fund's objectives align with your financial goals and risk tolerance.
2. Fund strategy: Understand the NFO's investment approach, sector focus, or unique strategies, which could affect return potential and risk.
3. Track record of the fund house: Evaluate the fund house's past performance in managing similar funds.
4. Costs: Check the expense ratio, entry/exit loads, and other charges, which can impact returns.
5. Market conditions: NFOs launch in various market cycles, so assess if it's an optimal time for the strategy.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.