Looking to start your investment journey in mutual funds? NFOs can be a good entry point. NFOs or New Fund Offers provide a chance to investors to get in on the ground floor of a new fund launch and seek to reap the long-term benefits as the fund grows. In this article, we’ll take you through the benefits of investing in NFOs and dispel some of the common myths surrounding them. But first, let’s understand what is an NFO in mutual fund.
- Table of contents
- What is an NFO in mutual fund?
- Benefits of investing in NFOs
- Busting some of the most common myths about NFO
What is an NFO in mutual fund?
A New Fund Offer (NFO) is a first subscription offering of a mutual fund scheme at a face value (base price) by a fund house. Investors can buy NFO mutual fund units at face value, and the fund house then uses this money to purchase multiple asset classes and seek to meet its goals. Moreover, investors can also subscribe to open-ended mutual funds, close-ended mutual funds, and Exchange-traded funds (ETFs) through NFOs.
How does an NFO work?
An NFO follows a structured process through which a mutual fund scheme is introduced, opened for subscription, funded by investors, and then made operational. The process includes:
- Scheme launch: The AMC introduces a new mutual fund scheme with a defined investment objective, asset allocation, risk profile, and investment strategy.
- Subscription period: Investors can apply for units during the NFO period, which remains open for a specified duration as mentioned in the Scheme Information Document (SID).
- Collection of funds: The AMC pools money received from investors during the offer period.
- Portfolio construction: After the NFO closes, the fund manager deploys the collected corpus according to the scheme’s stated investment mandate.
- Allotment of units: Investors receive units based on the amount invested and the applicable NFO offer price.
- Ongoing operations: Once the scheme becomes operational, its Net Asset Value (NAV) is calculated regularly based on the market value of the underlying securities. Investors in open-ended schemes can generally purchase or redeem units after the scheme reopens, subject to the scheme’s terms.
Types of NFOs in mutual funds
New Fund Offers (NFOs) can be classified based on the structure of the mutual fund scheme being launched. Some of the types are:
- Open-ended NFOs: An open-ended NFO launches a scheme that allows investors to purchase and redeem units directly with the mutual fund after the NFO period ends and the scheme reopens for ongoing transactions.
- Closed-ended NFOs: A closed-ended NFO launches a scheme with a fixed maturity period, such as three years or five years. Investors can subscribe during the NFO period, but fresh purchases from the AMC are generally not permitted after the offer closes. However, units are traded on secondary markets, where they can be bought and sold, depending on demand and supply.
- Interval fund NFOs: An interval fund combines certain features of both open-ended and closed-ended schemes. Investors can transact in units only during specified intervals announced by the AMC.
Benefits of investing in NFOs
- Diversify the portfolio: Many times, new mutual funds are launched to tap into the potential of up-and-coming industry sectors or technology. By investing in such NFO mutual funds, investors can diversify their portfolios and seek the opportunity of being amongst the early investors in new sectors to create long term wealth.
- New asset class: NFO introduces to you new asset classes that may have growth potential. If you find that the fund’s objective is aligned with your investment goals, you might want to invest early for long term benefit.
- Be one step ahead: Most fund houses launch NFOs to get into a booming sector or technology. This keeps you as one of the first investors in the scheme.
Things to keep in mind before investing in mutual fund NFOs
While an NFO can be an opportunity to participate in a new scheme right from inception, some important factors to consider include:
- Investment objective: Review the scheme’s stated objective to understand where and how the fund intends to invest.
- Risk profile: Different categories of mutual funds carry different levels of risk. Investors may evaluate whether the scheme’s risk level is suitable for their circumstances.
- Asset allocation: The proposed allocation across equity, debt, gold, or other asset classes may influence the scheme’s risk-return characteristics.
- Scheme Information Document details: The SID provides details about the investment strategy, risk factors, expenses, and other key aspects of the scheme.
- Comparison with existing schemes: Investors may examine whether similar mutual fund schemes already exist and how the new scheme differs in terms of investment approach or portfolio construction.
- Investment goals and horizon: The scheme should be evaluated based on its suitability for specific financial objectives rather than its newness.
Busting some of the most common myths about NFO
Here are 3 common myths about NFOs:
Myth #1: Investing in existing schemes is better than investing in NFOs.
Fact: NFOs allow you to enter a mutual fund scheme at face value. You should invest in an existing scheme or an NFO basis your risk appetite and investment goals.
Myth #2: NFOs are cheap.
Fact: The price of NFO mutual fund units is kept at face value. However, the actual cost of investment depends on other costs involved, including the expense ratio of the fund. The return on investment also determines how cheap or costly the investment is for you.
Myth #3: NFOs are only for young investors.
Fact: All investors can benefit from investing in NFOs if they align the investment with their goals, take calculated risks and carry out due diligence before purchasing the units.
By now, you already know why investing in NFOs is suitable for most investors. All you need is to do your homework before taking investment decision. You can consider seeking the help of financial expert to make an informed decision.
FAQs:
Are NFOs and IPOs same?
NFOs (New Fund Offers) and IPOs (Initial Public Offerings) are not the same. NFOs are issued by mutual funds, while IPOs are issued by companies to raise capital.
Is an NFO better than SIP?
NFOs and SIPs (Systematic Investment Plans) are different investment options and have their own advantages and disadvantages. There is no straightforward answer as to which one is better as it depends on individual investment goals and risk appetite.
How can I invest in NFO?
To invest in an NFO, you can either seek the help of a distributor or visit the website of the mutual fund company and follow the instructions for investing in their NFO.
How risky is NFO?
The answer to ‘how risky is NFO’ would largely depend on your risk-taking ability. However, generally, investing in NFOs is considered to be relatively risky as they are new mutual fund schemes with no track record. However, like any investment, the risk depends on the nature of the fund and the market conditions. You must carefully evaluate your risk-appetite before making any investment decision.
Is NFO tax-free?
NFOs are not tax-free, and investors may have to pay tax on capital gains or Income Distribution cum Capital Withdrawal (IDCW) earned from the investment, depending on their tax bracket and the holding period.
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Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.
