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What is New fund offer (NFO)? What needs to be considered before investing in NFOs?

A New Fund Offer (NFO) is the process through which an asset management companies creates a new support on a first-subscription basis to fund the purchase of assets.

How do NFOs function?

The New Fund Offer (NFO) could be open-ended, allowing you to enter or withdraw at any moment. It might be closed-ended, requiring you to purchase the scheme’s units within a 15-day period. You are not permitted to redeem the investment before the stated maturity term.

During the limited period, investors can invest in the NFO units at a price of about Rs. 10 per unit. The fund’s subscription period ends, and the fund manager invests the corpus in equities in accordance with the scheme’s investing goals. The closed-ended mutual fund program is listed on the stock exchange, and the units may be bought and sold exactly like shares.

After the New Fund Offer (NFO) period has expired, investors can only purchase units in the mutual fund scheme at the current NAV. It is often greater than the NFO price. Investors might invest in non-financial offerings (NFOs) of debt schemes. Several investors, nevertheless, choose the new fund offerings of equity policies. Generally, NFO subscribers have been able to produce substantially higher profits post-listing.

Types of Mutual Funds New Fund Offer (NFOs)

There are 2 types of New Fund Offer (NFOs) Mutual Funds:-

• Open – Ended Schemes – Following the New Fund Offer (NFO), all investors can participate in an open-ended scheme. Investors, comprising NFO members, can then redeem their bought units whenever they choose.
• Closed – Ended Schemes – NFO investors in closed-ended programs are unable to quit the fund even after the NFO term has finished. Such funds typically have a maturity term of 3-5 years, and investors may only leave after the fund has fully matured. These funds can, theoretically, be exchanged on stock markets before maturity period also. Their liquidity on exchanges, however, is typically quite low.

Why is New Fund Offer (NFO) a good investment?

The fund house uses an New Fund Offer (NFO) to generate funds from the general public in order to acquire market instruments like equity shares, bonds, etc. Because NFO is new to the market, it is less expensive than current funds. They are similar to Initial Public Offerings (IPOs), wherein the general public can acquire shares before they are listed on a stock market. Furthermore, the extensive marketing efforts which go into its promotion make it a too-good-to-pass-up chance. Nevertheless, before choosing on one, you should use your discretion and intelligence.

Things to think about as an investor

• Fund House Reputation

Before investing in an New Fund Offer (NFO), the reputation of the fund company is critical. In case an investor want to invest in an NFO, it is critical to do a background investigation on the fund house. Ascertain if the fund house has a long history of functioning in the mutual fund sector, preferably 5 – 10 years. It will assist investors in analysing the fund house’s performance amid market ups and downs. If the fund house has a strong track record, the NFO may deliver on its promises. This improves the investor’s chances of receiving larger returns from the fund.

• Fund Objectives

The next point to take in account while investing in a New Fund Offer (NFO) is the fund’s objective. The fund goals, among other things, specify asset allocation, riskiness, projected returns, and liquidity. It assists you in developing an opinion about the NFO’s feasibility. An NFO must explicitly describe its investment procedure, which it will follow over the specified investment horizon. Simply put, reading the offer document should assist potential investors understand what the fund management will do with their money. If investors are not able to understand the NFO’s goals, it indicates flaws in the investing process.

• Theme of New Fund Offer (NFO)

One essential element to consider while investing is the theme of the fund. The Indian mutual fund market is overflowing with mutual fund programmes. When encountering an NFO, it is thus recommended that you carefully study the fine print in order to grasp the fund concept. The investing concept has to be long-term and unique to the existing programmes. Yet, if the new fund offer is simply a replica of an existing approach, it is unlikely to be a viable alternative. One should contemplate a fund that will last at least 5 years.

• Returns associated with an NFO

If you are interested in an New Fund Offer (NFO), you should look at the traditional results. This information may or may not be mentioned in the offer agreement. You may specify an expected rate of return against which to evaluate the fund. If you have already invested in the fund, you should consider revisiting it quarterly for the first 3 years. To evaluate the return trend, comparing the mutual fund’s performance to that of the index and peer funds is a good option.

• Factor risks in NFOs

Investing in New Fund Offer might be risky. Unlike current funds, where the asset allocation & risks can be easily checked, NFOs do not have a track record. Furthermore, you will be unable to judge how the fund management intends to use your money. It will be impossible to anticipate the fund’s success if you do not have any benchmarks or metrics. It’s unclear whether the fund succeeds or fails.

• Cost of investment

The overall cost of investing is one of several factors that determine your potential profits. Although there’s no initial load, certain NFOs impose exit loads if you redeem units before the duration is over. If the lock-in period is greater than your investment horizon, the exit loads may have an impact on your results. Another important factor is the expense ratio, which is the yearly fee imposed by the fund house for managing your money. Verify to see if the expense ratio is lower or equivalent to what SEBI requires is advisable.

• Minimum Subscription Amount

Typically, New Fund Offer stipulate a minimum subscription amount for investors. It may be as little as Rs. 500/- or as much as Rs. 5,000/-. As an investor, this might be your key criterion for narrowing down your potential investments. If the minimum membership price is more than you can afford, it is a good idea to reconsider your alternatives. In such circumstances, a systematic investment plan (SIP)^[1] in an established high-performing scheme may be a more affordable and convenient option.

• Investment Horizon

Lock-in durations for New Fund Offer (NFOs) range from 3 – 5 years. In these instances, investors will be obliged to remain invested throughout the duration of the term. Ascertain that your investments are consistent with your investing horizon and objectives. If you subscribe to a mutual fund scheme, you may not be able to redeem your units until the plan matures. You may also be charged a pre-exit fee (exit load) in some instances. If your chosen New Fund Offer (NFO) is longer than your investing horizon, you should reconsider your alternatives.

• Market conditions

Another essential consideration when considering an investment is the state of the market. When making an investment, the market should be steady or non-volatile. If you don’t consider the market conditions while investing in New Fund Offer (NFO), you could wind up losing money in the short run.

Conclusion

The mutual fund business is vast and varied. There are hundreds of funds in various categories distributed across the industry’s numerous segments. However, fund companies continue to offer new funds every year. Investing in New Fund Offer (NFOs) might be a good alternative if you want a fund that has the potential to provide something ‘new.’

Read our article:Mutual Funds – Different types of Mutual Funds in India