What is NFO (New Fund Offer)? - Complete Information

What are the Different types of NFO?

There are two main types of NFOs. They are discussed in detail below:

1. Open-Ended Funds
   1. Open-ended funds are investment vehicles that offer flexibility to investors.
   2. One defining characteristic is that investors can buy or sell units of the fund at any time, and the fund continually issues new units or redeems existing ones based on investor demand.
   3. This structure allows for liquidity, as investors can enter or exit the fund at the Net Asset Value (NAV), which is the per-unit market value of the fund's assets.
   4. The NAV is calculated regularly, reflecting changes in the value of the underlying assets.
   5. These funds are actively managed by professional fund managers.
   6. Active management involves making strategic decisions to optimize the fund's performance.
   7. Fund managers may adjust the portfolio holdings in response to market trends, economic conditions, and the fund's investment objectives.
   8. Open-ended funds are suitable for investors seeking flexibility and active management, and they are often chosen for long-term investment goals.
2. Closed-End Funds
   1. Closed-end funds have a fixed number of shares or units issued during the initial public offering, known as the New Fund Offer (NFO).
   2. Once this fixed number of shares is issued, no additional shares are created.
   3. These funds are then listed and traded on a stock exchange, where investors can buy or sell existing shares.
   4. Unlike open-ended funds, the price at which closed-end fund shares trade on the exchange is determined by market demand and supply, and it may differ from the Net Asset Value (NAV).
   5. Closed-end funds often trade at a premium or discount to their NAV.
   6. If the market price is higher than the NAV, the fund is said to trade at a premium. Conversely, if the market price is lower than the NAV, it is trading at a discount.
   7. Closed-end funds are typically managed with a more passive approach, aiming to replicate the returns of a specific benchmark index.
   8. They appeal to investors looking for a fixed pool of assets and are often considered for income generation through dividends.
   9. However, they may lack the flexibility and liquidity offered by open-ended funds.

Is it Good to Invest in NFO?

1. In a new fund offer, investors can subscribe to the units of a mutual fund scheme for a fixed price of Rs.10.
2. Most people invest in NFOs to take advantage of the low prices of the units expecting to achieve significant capital gains when the market is at a peak.
3. Many investors also subscribe to NFOs as they feel that NFOs are a value for investment proposition.
4. Fund houses use NFOs for achieving their AUM (Assets Under Management) goals.

Note: NFOs are not at all like IPOs

Difference between an NFO and an IPO

Both IPOs and NFOs are launched to raise capital from the public but the difference between them is that IPOs concern equities of firms while NFOs concern units of a mutual fund scheme.

Different Ways to Invest in a New Fund Offer (NFO)

Investing in a New Fund Offer (NFO) presents various avenues, with three distinct methods available:

1. Broker Assistance
   1. A foundational approach to NFO investment involves seeking guidance from a broker.
   2. It is imperative to select an authorized broker to ensure a secure investment journey.
   3. The broker plays a pivotal role in streamlining the entire application process for the NFO, managing all requisite formalities.
   4. Opting for this method not only provides the convenience of doorstep services but also grants investors access to valuable insights into the potential performance of the selected fund.

1. Online Trading Account
   1. Another user-friendly and convenient method is leveraging your existing online trading account, particularly if you are already engaged in shares and mutual funds.
   2. This account serves as a versatile tool, extending its functionality to include NFO investments.
   3. Online transactions, encompassing both the purchase and sale of NFO units, can be seamlessly executed.
   4. Furthermore, the online trading account functions as a valuable instrument for monitoring the Net Asset Value (NAV) of your investments, ensuring investors stay well-informed about their portfolio performance.

1. Online Platforms
   1. The third method involves tapping into a diverse array of online platforms dedicated to investment.
   2. These platforms are designed with a user-friendly interface, offering a seamless and intuitive experience for investing in NFOs. Investors can explore a wide range of NFO options, enabling them to make well-informed decisions through the online platform.
   3. This method not only provides accessibility but also empowers investors to carefully select and tailor their investment choices based on their preferences and financial goals.

Things to Consider before you invest in NFOs

1. Reputation of the fund house
   1. Before investing in a new fund offer, ensure that you do a background check of the investment firm that is going to manage the scheme. The fund house should have operated in the mutual fund industry for a period between 5 years and 10 years.
   2. Assess the performance delivered by the AMC over those years and invest only if it has a good track record. If you are not satisfied after doing a background check, you can choose not to invest in the NFO of that particular fund house and pick an NFO of a reputed fund house instead.
2. Objectives of the fund
   1. The investment objectives of the fund will give you information about where the assets will be allocated, what are the risk factors associated, liquidity, expected returns, etc.
   2. Simply put, you will have an idea about where your fund manager is going to invest your money. The objective of the fund will help you determine if the NFO is promising enough to fetch you optimal returns on your investment.
3. Theme of the New Fund Offer
   1. The mutual fund arena is flooded with more than 8,000 schemes and hence, you should invest in an NFO only if it has something unique to offer. Read the scheme information documents thoroughly to understand the theme of the fund.
   2. It is always better to invest in a fund which is performing better than to invest in a new fund offer which does not seem like a viable proposition.
4. Risks
   1. Investments in NFOs may be a risky affair as it is not possible to assess where your money will be invested, like in an existing fund where you can check for the asset allocation. This is because in an NFO, allocation of funds cannot be done until the entire money is collected.
   2. NFOs also do not have a performance history and hence, you will not be able to ascertain how the fund is going to perform.
5. Returns
   1. NFOs do involve a certain risk but that does not mean that investing in them is a totally bad idea.
   2. Some NFOs can turn out to be winners and fetch you really good returns aiding you in wealth creation.
   3. Analyse the return aspect of the NFO if you are really interested in it.
   4. However, if you have already invested in the NFO, then it is advisable to do a review once a quarter for the initial 3 years.
   5. Doing so will help you understand if the fund is performing well and if not, you can redeem the units and invest in some other fund.
6. Investment horizon
   1. Before you decide to invest in an NFO, do not forget to consider your investment horizon and objectives.
   2. Some NFOs may have a lock-in period applicable to them which means that you cannot redeem the units until the lock-in period is over.
   3. An exit load may also apply on redemption and hence, it is recommended that you do not invest in an NFO if your investment horizon does not align with the investment horizon of the scheme.
7. Cost
   1. Another factor that you need to consider before investing in an NFO is the expense ratio. Opt for the NFO if it offers a lower expense ratio than an existing fund having the same investment objectives.
   2. Also, check for the exit load charged by the NFO so that you do not lose a huge amount if for some reason, you wish to withdraw from the scheme before the maturity date.
8. Minimum subscription amount
   1. The minimum subscription amount for NFOs may range between Rs.500 and Rs.5,000. If you feel that you can afford to make that sort of an investment in one go, you can go ahead and invest in an NFO.
   2. Otherwise, you can opt for a SIP (Systematic Investment Plan) in an existing fund with a good track record.