What is NFO (New Fund Offers) in Mutual Funds?

When choosing a mutual fund, there is no shortage of choices, but that can make it difficult to choose which one is right for you. Newer investment options are popping up all the time, offering alternatives to investors who want something different from the standard choices. So how do you know if these funds are ideal for you? To help investors navigate this changing world of funds, we’ve outlined what they need to know about new fund offerings and how they might impact their portfolios.

What is NFO or New Fund Offer?

An NFO is used to offer units in a mutual fund scheme to public investors for the first time. NFOs, other than ELSS can remain open for a maximum of 15 days. Allotment of units or amount refund is done within 5 business days of closure of the scheme. Further, open-ended schemes re-open for sale and re-purchase within 5 business days of the allotment.

• NFO Open Date – This is the date from which investors can invest in the NFO
• NFO Close Date – This is the date upto which investors can invest in the NFO
• Scheme Re-Opening Date – This is the date from which the investors can offer their units for repurchase to the scheme (at the re-purchase price); or buy new units of the scheme (at the sale price, which is the NAV itself). The AMC announces Sale and Re-purchase prices from the Scheme’s Re-Opening Date.

For Close-ended Schemes, there is only the NFO Open Date and NFO Close Date. They do not have a Scheme Reopening Date, because the scheme does not sell or re-purchase units. Investors will need to buy or sell units in the stock exchange(s) where the scheme is listed.

Benefits of Investing in NFO

Investing in New Fund Offers (NFOs) can offer several potential benefits to investors:

• Opportunity for Early Entry: NFOs represent the launch of a new mutual fund scheme or investment product. By investing during this initial phase, investors can potentially benefit from lower initial costs and get in at the ground level of a new opportunity.
• Potential for Higher Returns: Since NFOs are launched with a specific investment objective or theme, they may offer the potential for higher returns if the underlying assets perform well. Early investors can capitalise on this potential growth.
• Access to Unique Strategies or Themes: NFOs are often launched to target specific investment strategies, sectors, or themes that may not be readily available through existing mutual funds or investment options. Investing in an NFO can provide exposure to these unique opportunities.
• Possibility of Lower Expense Ratios: In the initial stages, NFOs may have lower expense ratios compared to established funds. This can translate to lower fees for investors, potentially improving overall returns.

Advantages and Disadvantages of Investing in NFOs

Advantages of Investing in NFOs

1. Lower entry cost: NFO NAV value is fixed at ₹10. It is called the launch price. The lower entry cost is especially attractive to investors who wish to start with a smaller initial investment.
2. Experienced fund manager: Companies often launch NFOs with well-experienced fund managers. This inspires investors’ confidence and attracts them to invest in the fund.
3. Investing in new strategies: Close-ended NFOs invest using new and innovative strategies not offered by existing open-ended funds, allowing investors to diversify their mutual fund portfolios.

Disadvantages of investing in NFO

1. Lack of track record: Since these funds are new products, they have no real track record and are difficult to evaluate in the early days. The more unique an NFO, the higher the risk of investing in untested strategies.
2. No benefit of early investment: NFOs are not IPOs. Investors of IPOs can benefit from early investments when the stock price increases. However, mutual fund NAVs don’t increase or fall like stock prices. This is because mutual fund NAVs don’t change throughout the day like stock prices.
3. Lower liquidity: NFOs usually have lower liquidity because they have fewer investors compared to established mutual funds. This may make it difficult for investors to exit their investments.
4. Higher expense ratio: NFOs usually have a higher expense ratio during the early days, which may impact your final returns.
5. Replication of an existing fund: Sometimes NFOs may follow the same investment style and objective as an existing mutual fund offered by the company, which can result in duplication in the investor’s portfolio without offering any unique benefit.

Types of New Fund Offers

NFOs are primarily two types: open-ended and close-ended

1. Open-ended: Open-ended funds have no fixed maturity date. Investors can buy or sell the units at any time at a prevailing NAV value. These are suitable for investors who want flexibility and liquidity.
2. Close-ended: These funds issue a fixed number of units at inception. They also have a fixed maturity date. Investors can only sell the units at the end of the investment period. These funds are suitable for investors who want to invest for a fixed duration and don’t bother about maturity.

Let’s consider a hypothetical scenario with a similar structure but with an open-ended fund called Fund Y: Scenario: An Asset Management Company (AMC) launches Fund Y, an open-ended mutual fund with an initial NAV of ₹100 per unit. There is no fixed maturity date, and investors can buy or sell units at any time at the prevailing NAV. The fund has a total capital of ₹10,000, divided into 100 units. Individual A decides to invest in Fund Y by purchasing 10 units at the initial NAV of ₹100 each. After a few months, the market experiences a positive phase, leading to an increase in the NAV of Fund Y to ₹120 per unit. Individual A decides to sell all their units in Fund Y at this higher NAV, capitalising on the positive market trend. Later on, Individual A decides to reinvest in Fund Y when the NAV drops to ₹110 per unit, purchasing 10 units. At the end of the year, Individual A decides to redeem their units in Fund Y. The NAV remains at ₹100 per unit, consistent with the initial investment. However, since the fund generated a 15% annual return, Individual A receives a distribution of ₹15 per unit in addition to the redemption value. Let’s calculate the profit made by Individual A in this scenario:

1. Selling 10 units at ₹120 per unit: ₹120 * 10 = ₹1,200
2. Buying 10 units at ₹110 per unit: ₹110 * 10 = ₹1,100
3. Redemption value at ₹100 per unit: ₹100 * 10 = ₹1,000
4. Distribution received per unit: ₹15 * 10 = ₹150

Total cash profit made by Individual A: = (Selling – Buying) + Distribution = (1,200 – 1,100) + 150 = ₹250 Individual A’s profit in this scenario is ₹250, similar to the profit made in the close-ended fund example. However, in the open-ended fund, Individual A had the flexibility to buy, sell, or redeem units at any time without any restrictions on the number of units or total capital.

Key Questions to ask before buying into a New Fund

There are a few questions you should ask when considering whether to invest in an NFO. For example – How long you will be investing in this fund? What is the fund’s fee structure? What is the fund’s investment strategy? Additionally, here are some more points to consider before you invest in an NFO:

Reputation of the Fund House/AMC:

To ensure that your money is invested wisely, evaluate the performance of the fund house across market cycles and relative to its peers to determine whether it is a good investment.

Fund’s Objectives:

Examine all of the scheme-related documentation extensively to understand how the fund is invested and how the investment process works. Make sure your investment objectives align with those of the mutual fund to make it a worthwhile investment for your portfolio.

Risk Tolerance Levels:

Investing in NFOs is a risky venture because it does not allow you to conveniently evaluate the performance track record of existing funds. Prior to investing in NFOs, you should assess the risk level of the scheme and whether it is in line with your risk taking capacity.

Investment Horizon:

When investing in NFOs, the investment horizon is critical as some have lock-in periods during which you must remain invested for a specified duration. This implies you may not be able to withdraw your money before the maturity date, and you may be charged an exit fee. Look at these aspects carefully prior to investing in NFOs and ensure that your investments are consistent with your investment timeframe and objectives.

How To Invest in NFO?

Here is a step-by-step guide to investing in NFO through Angel One Step 1: Log in to your Angel One app with your mobile number and validate with OTP. Next, enter the MPIN. Note: If you don’t have an Angel One Demat account, you can open one quickly by completing the online account opening process. Step 2: On the homepage, click on the Mutual Fund option. Step 3: Now click on the “New Fund Offering (NFO)” option and select the NFO you want to invest in after checking the fund manager name, your investment horizon and other factors. Step 3: Now, click on the “Invest Now” option. Step 4: Select the SIP or One TIme option at your convenience. One-time investment means you invest a lump sum amount, while SIP requires investing a fixed amount on a monthly basis. However, not all NFOs have both options. Step 5: Finish your payment through UPI or net banking. After making the payment, your transaction will be executed.

Some related terms

Fund House:

The fund house or AMC is the fund’s investment manager and carries out all the fund-related activities of the Mutual Fund, like the purchase and sale of securities in the portfolio of various Mutual Fund schemes launched by the Mutual Fund.

Investment Objective:

The investment objective outlines the financial objective the scheme intends to achieve and spells out the level of risk it is likely to assume while trying to achieve this objective.

Offer Document:

The document that contains the details of a particular mutual fund scheme offered to the public for investing is known as an Offer Document or Prospectus.

Open-ended Fund:

An Open-ended Mutual Fund is one which is launched once the NFO ends and allows you to enter and exit the fund anytime you wish to post-launch.

Summing Up

A New Fund Offer or NFO refers to the initial launch of a mutual fund scheme by an asset management company or AMC. It is similar to an IPO in the share market, as NFOs are intended to raise capital for the fund and attract investors. However, they are marketed in a less aggressive manner than IPOs and are targeted towards certain select groups of investors. If you are looking to invest in an NFO, it is recommended that you should do adequate research such as checking the fund’s expense ratio and the performance of previous funds offered by the investment company.

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