How To Invest in a New Fund Offer (NFO)?

A New Fund Offer or NFO refers to the initial offer of units of a new mutual fund scheme floated by an Asset Management Company (AMC). It represents the launch of a fresh mutual fund, giving investors a chance to subscribe to the fund from inception. NFOs are somewhat similar to IPOs but for mutual funds.

Typically, an NFO is kept open for 2-3 weeks. During this span, investors can apply to the scheme by filling out an application form and subscribing to the units. Here is a detailed guide on investing in mutual fund NFOs.

What is a New Fund Offer?

A New Fund Offer (NFO) marks the debut offering of a new mutual fund scheme by an AMC. It's the first subscription offer for a scheme launched by the fund house.

An NFO allows investors to enter a mutual fund in its nascency before it becomes available for ongoing purchases post-listing. Units are issued to investors at face value during the NFO.

Why do Fund Houses Launch NFOs?  

AMCs introduce NFOs of mutual fund schemes for several reasons:

• To launch new categories of funds

When a particular asset class, like infrastructure, banking, pharma, etc., becomes lucrative, fund houses launch sectoral or thematic schemes targeting those sectors via the NFO route.

For instance, top mutual funds like ICICI Prudential and Aditya Birla Sun Life run dedicated banking and financial services funds to capitalize on this high-growth domain.

• To tap growth opportunities

During periods of buoyant market sentiment and surge in equity inflows, AMCs come up with NFOs across categories to encash the positive investor demand. Many NFOs are timed around market peaks or a bull market.

• Regulatory compulsion

SEBI regulations state that one AMC can have just one open-ended scheme per category. So, fund houses issue multiple NFOs within permitted domains like sectoral funds and index funds to expand their bouquet of choices for investors.

• As a revival tool

Fund houses sometimes utilise NFOs as an opportunity to regain lost footing, especially post periods of lacklustre performance, which eroded their Assets Under Management (AUM). An NFO helps make a fresh beginning.

Types of Mutual Funds Launched via NFO Route

AMCs issue varied categories of mutual fund schemes via New Fund Offers across market cap segments. These NFOs may be launched as open-ended, close-ended or interval funds.

Open-Ended Funds

In an open-ended structure, investors can subscribe to the units during the New Fund Offer period and then enter/exit the fund anytime after listing on an ongoing basis. 

Open-ended funds provide high liquidity to investors as redemptions and re-purchases are allowed seamlessly.

The entry/exit happens directly at the Net Asset Value (NAV) the AMC declared.

Actively managed funds across categories - equity, debt and hybrid funds usually follow this structure.

Pros of Open-Ended Funds

• High liquidity 
• Entry/Exit at NAV pricing
• Flexibility of entry, additional purchase, redemption

Cons of Open-Ended Funds

• Prone to redemption pressures during market volatility
• Portfolio churning due to fund inflows/outflows

Closed-Ended Funds

In closed-ended funds, the fund access remains restricted to the NFO offer period only. The scheme gets closed for further subscriptions or redemptions after the NFO closure date.

The only window for investors to enter/exit subsequently is when the units get listed and start trading on the stock exchange.  

As trading happens on an exchange, the prices can vary, unlike fixed NAVs.

Close-ended funds provide medium-to-long-term investment opportunities for 3-5 years, resembling fixed deposits.

Since assets are not prone to immediate withdrawals, fund managers get long-term capital for value investing without the pressures of liquidity management.

Pros of Close-Ended Funds

• Won't encounter redemption pressures  
• Fund manager flexibility for long-term calls
• Opportunity for long-term wealth creation

Cons of Close-Ended Funds

• Lock-in period with no redemption facility
• Lack of liquidity 
• Entry/exit at variable market prices

Interval Funds

Interval funds showcase traits of both open-ended and close-ended structures. Like closed-ended funds, the interval category allows fresh subscriptions only during the New Fund Offer period.

Then subscriptions get closed for new investors until the next interval comes up.

However, pre-existing investors can redeem units at predefined quarterly/half-yearly/annual intervals. So, partial liquidity does exist.

Interval funds provide stability to closed-ended funds and liquidity windows similar to open-ended funds.

Hence, it appeals to investors eyeing medium-term goals.

Pros of Interval Funds

• Less volatility compared to open-ended funds
• Periodic liquidity option through redemption

Cons of Interval Funds

• Lock-in period between liquidity windows
• Market-linked returns post-listing  

NFO Allotment Process

The allotment process in the case of NFOs follows these key steps:

• Launch of New Fund Offer

AMC files offer documents with SEBI and launch the scheme by opening a subscription window for a fixed NFO period. 

• Investor Application 

During this span, investors apply for units by filling out the application form and the investment amount. KYC documentation is furnished.

• Closure and Allotment

Once the NFO closes, the registrar aggregates valid applications and allots units to investors proportionally.

• Account Statement Generation 

Finally, investors receive an allotment confirmation specifying the number of units allotted against the investment amount.

How to Apply During an NFO?

Applying to a New Fund Offer(NFO) simply involves:

• Selecting the Fund House: Based on parameters like reputation, performance, fund management pedigree, etc.
• Choosing the Scheme: As per your investment goals and risk tolerance. Evaluate Scheme Information Document.
• Determining Investment Amount: Factor in disposable surplus, targeted returns and financial goals.
• Deciding Investment Mode: Either lump sum investment or systematic flows via SIP based on preference.
• Filling Application Form: Provide investment details and personal information.
• Attaching Payment: Add a cheque or make an online payment while submitting the application.

Things to Remember Before NFO Application

Here are some things to evaluate before investing in NFOs:

• Analyse Investment Objective

Start with understanding if the NFO category and positioning match your return expectations and risk appetite. This helps avoid blind investing.

• Check Fund Pedigree

Opt for funds from AMCs with long operating history, strong AUMs, large investor base and stellar track record. Evaluate the AMC’s execution capabilities based on the success of its existing schemes across market cycles.

• Evaluate Fund Management

Profile fund managers helming the scheme on aspects like experience, schemes handled and returns delivered.

• Understand Investment Composition

Clarity on the intended investment mix across equity, debt, etc., helps estimate returns vis-a-vis risks. 

• Factor in Expenses

Be mindful of costs like admin expense ratios and exit loads and their bearing on eventual returns.

Investment Avenues - Online and Offline

Applying to NFOs is fairly simple, quick, and convenient, and it can be done through both online and offline routes.

Offline Investment Route

1. Walk into the Asset Management Company branch or the office of the mutual fund distributor to procure the physical application forms.
2. Fill in all requisite personal and investment details in the designated application form.
3. Attach the investment cheque and KYC documents. Submit the form at designated collection centres.

Online Investment Route 

1. Alternatively, you can invest completely digitally by leveraging online investment platforms for a paperless and hassle-free experience.
2. Visit the investment platform's website or mobile app and register yourself.
3. Log in using your username and password credentials along with OTP authentication.
4. Browse through the NFOs available, select the scheme of choice and fill applications with a few clicks. 
5. Make payments online using net banking, UPI, payment cards etc. 

IPOs vs NFOs – Key Differences

While IPOs and NFOs sound similar, as they both allow investors to subscribe to newly launched offerings, there are fundamental differences:

Parameter	IPO	NFO
Full form	Initial Public Offer (IPO)	New Fund Offer (NFO)
Purpose	To raise capital via fresh issue of shares or via offer for sale (OFS) by existing investors	To raise capital by issuing fresh units of a new MF scheme
Offer Price	Discovered through book building process based on investor demand	Fixed at ₹10 per unit
Investor Quotas	Separate quota reserved for retail, HNIs etc.	No pre-allocated quotas
Effect of Demand	Excess demand spikes issue price	No influence of demand on offer price
Listing	Mandatory	Optional

Conclusion

NFOs offer a unique opportunity to embark on a mutual fund's journey right from inception as a founding investor. Gain a thorough understanding of the fund category, objective, risk attributes, costs, etc., to make an informed decision. 

Hope this detailed guide on New Fund Offers equips you to invest smartly in future NFOs and build rewarding portfolios! 

In the upcoming chapter, we’ll look at some of the challenges in investing in an NFO and learn more about mutual fund investing.