Updated Feb 11, 2022

What is an NFO?

What Is NFO?

A New Fund Offer (NFO) is how an asset management firm raises money for its securities purchases by launching a new fund on a first-subscription basis.

What is the New Fund Offer and how does it work?

The chance to subscribe to a new fund offer is only available for a short time in a new fund offer. Investors can purchase units of the mutual fund scheme and subscribe to the NFO at an offer price during the pre-defined time. In most circumstances, this is set at Rs. 10 in most cases. After the tenure has expired, investors will be entitled to purchase fund units at the specified price. After the listing, NFO subscribers have seen much higher returns on average.

Why is the NFO a good investment?

An NFO is used by a fund house to raise money from the public to purchase market instruments such as equity shares, bonds, and so on. NFO is less expensive than current funds because it is fresh to the market. They're comparable to Initial Public Offerings (IPOs), which allow the general public to purchase stock before it is listed on a stock exchange. Additionally, the marketing efforts that go into its promotion make it a can't-miss occasion. However, before selecting one, you may need to use your judgment and knowledge.

Who decides to invest in a New Fund Offer?

Most investors look for mutual fund investment possibilities when the markets are at their highest. They want to get into the market, whether it's gold or real estate because they believe it will continue to climb. They do, however, choose profitable investments that are offered at a lower cost. Asset management companies (AMCs) strive to take advantage of this investor mindset. This is why individuals are drawn to the NFOs that appear to be less priced. Investors find the NFOs to be a good investment and subscribe to them. As a result, the fund houses will be able to meet their objective of increasing their Asset Under Management (AUM). 

As an investor, there are a few things to think about.

The reputation of the Funding House

If an investor wants to invest in an NFO, it is critical to conduct due diligence on the fund house. Check to see if the fund firm has a long track record in the mutual fund industry, at least 5 to 10 years. It will assist you in determining the fund house's performance throughout market ups and downs. The NFO may perform as promised if the fund firm has a solid track record.

Objectives of the Fund

The asset allocation, riskiness, expected returns, and liquidity, among other things, is all spelled out in the fund goals. It aids in the formation of an opinion about the NFO's viability. An NFO must clearly define its investment process, which it will follow for the duration of the investment horizon. Simply put, examining the offer document should help potential investors understand how the fund manager plans to use their money. If investors can't figure out what the NFO's goals are, there are flaws in the investment process.

The New Fund Offer's Theme

The Indian mutual fund industry has a plethora of mutual fund programs. When you come across an NFO, it's a good idea to read the fine print carefully to understand the fund's purpose. The investing theme must be long-term and deliver something that other programs do not. However, if the new fund offer is simply a rehash of an existing approach, it is unlikely to be a viable option.

Returns

It's a good idea to look into the previous performance of an NFO if you're considering investing. This information may or may not be mentioned in the offer document. You can calculate a predicted rate of return and compare it to the fund's performance. If you've already put money into the fund, you might want to consider reviewing it quarterly for the first three years. To understand the return trend, you can compare the mutual fund's performance to that of the index and peer funds.

Danger Factor 

Investing in non-financial organizations (NFOs) could be dangerous. NFOs, unlike existing funds, do not have a performance history that allows you to easily examine the asset allocation and risks involved. You won't be able to see how the fund manager plans to use your money, either. It will be difficult to estimate the fund's success without any standards or measurements. It's possible that whether the fund succeeds or fails will remain a mystery.

Investment costs

One of many factors that determine your prospective profits is the total cost of your investment. Although there is no admission fee, some NFOs charge exit fees if you redeem your units before the tenure is up. If the lock-in period is greater than your investment horizon, the exit loads may have an impact on your returns. Another important factor is the expense ratio, which is the annual fee imposed by the fund house for managing your money. Check to see if the expense ratio is less than or equal to what SEBI requires.

Subscription Minimum Amount

Investors are normally required to pay a minimum subscription amount when investing in NFOs. It could be anything from Rs 500 to Rs 5,000. As an investor, this could be your major criterion for narrowing down your investment options. If the minimum membership price is more than you can afford, reconsidering your options is a good idea. In such instances, you may want to consider enrolling in a systematic investment plan (SIP) in an established high-performing scheme, which is a more cost-effective and convenient option.

Perspective of Investment

NFOs are likewise subject to lock-in periods of three to five years. In such circumstances, you will be forced to invest for the duration of the contract. Make sure your investments are appropriate for your investment horizon and objectives. You may not be able to redeem your units before they mature if you subscribe to a mutual fund scheme. You may also be charged a pre-exit fee (exit load) for the same in some situations. If your preferred NFO is longer than your investing horizon, it's a good idea to reconsider your options.

Types of New Fund Offer

You should be aware that there are two sorts of NFOs: Closed-ended Funds and Open-ended Funds, before participating in the new mutual fund offer.

Close-ended funds

This type of fund has fixed units when a New Fund Offer is released. Here the only specific number of funds units is offered in the portfolio. No new investors are allowed to join the plan from the beginning to the end, and existing investors are not allowed to depart throughout the subscription period. This form of NFO has a three- to four-year duration. The market exchange allows investors to sell or buy mutual funds.

Open-ended funds

When the NFO term period expires, this sort of fund is launched. Investors can subscribe to the NFO before the NAV is calculated under this arrangement. This aids investors in making long-term gains. The acquisition and selling of NFO units depreciate the fund's value.

Both types of funds provide capital and dividend returns to investors.

Bottomline on Investing in NFO

Are you willing to invest in a new mutual fund? Make sure you contact a reputable fund firm; understand the risk considerations, minimum subscription amount, historical returns, and the length of time you plan to invest. If you have a thorough understanding of NFO, it is the ideal alternative to help you develop your money. Before investing in the New Fund Offer, we recommend familiarising yourself with the terms and circumstances.