What is NFO? – All You Need to Know about New Fund Offer

With the growing popularity of mutual funds in India, the number of fund houses or AMCs (Asset Management Companies) has increased too. Browse through the website of top AMCs, and you will see that they offer different types of mutual fund schemes to the investors.

But have you ever wondered how these schemes came into existence? Through NFOs. If you wish to invest in mutual funds, you must be aware of NFO. Investing in a mutual fund scheme during the NFO period could prove highly rewarding. Take a look at what NFOs are, how they work, and their benefits.

An NFO or New Fund Offer is when a fund house launches a new mutual fund scheme. Just like stock market IPOs (Initial Public Offerings), it is with the help of NFOs that the fund houses raise the initial capital for purchasing securities that are in line with the fund objective.

The NFO is open for a specified duration, and it is during this period that investors could invest in the scheme at the offer price. In India, the NFO price in mutual funds is generally fixed at Rs. 10 per unit of the mutual fund scheme. Once the NFO period expires, existing or new investors can only purchase units of the scheme at a specified price, which is generally higher than the NFO price.

Yes and no. For starters, IPO is conducted before listing shares of a company on indices like Sensex and Nifty. NFOs, on the other hand, is when an AMC launches a new mutual fund scheme.

During the IPO period, investors can purchase a particular stock at a fixed price by subscribing to it. It is only after the IPO that the stock is listed on exchanges. The IPO investor earns profit if the listing price of the stock is higher than its IPO price. But investors could also lose money if the listing price of the stock is lower than the price they have paid during the IPO.

NFOs are considerably safer in this aspect.Mutual fund NAV (Net Asset Value) is calculated by dividing the total assets of the scheme by total units issued to the investors. The same formula for NFO, as well as the post-NFO period. But the NFO price is generally Rs. 10. So, there is a higher possibility of the NAV rising after the NFO.

NFO mutual funds are generally of two types-

1. Open-Ended

   After the NFO, an open-ended scheme is available for all the investors. The investors, including the NFO subscribers, can then redeem their purchased units anytime they like.

2. Close-Ended

   In close-ended schemes, NFO investors are not able to exit the fund even after the NFO period. These funds generally have a maturity period of 3-5 years, and investors can only exit after maturity. In theory, these funds can also be traded on stock exchanges even before maturity. But their liquidity on exchanges is generally very low.

• Generate Profits

  As discussed above, there can be a significant difference between the NFO price and the NAV. This difference can sometimes be highly rewarding.

• Invest in Innovative Funds

  Many AMCs are now launching innovative mutual funds schemes. For instance, some schemes specifically invest in recently-listed stocks and IPOs. And some schemes use hedging strategies to generate better returns for the investors. With NFO, you get to invest in such funds before it is open to every investor.

• Lock-in Period for Disciplined Investing

  A lot of people invest in mutual fund schemes only to redeem it after a few months. This negatively impacts the investment goals. But with NFOs, like close-ended NFO, there is a lock-in period for which you must to remain invested. This makes investment more disciplined and also increases the returns potential.

The AMCs generally send emails to their registered customers whenever they launch a new scheme. They also advertise the same on the internet, television, radio, newspaper, etc. Alternatively, you can visit the official website of AMCs to know more about their upcoming NFO funds.

If you’d like to subscribe, you can subscribe during the NFO period. You must complete your KYC (know your customer form) online if this is the first time that you are investing in mutual funds. NFOs also have a minimum subscription amount ranging from Rs. 500 to Rs. 5,000. Once the KYC is done, you can then invest an amount equal to or higher than the minimum subscription.

While NFOs could be highly rewarding, it is wrong to assume that every NFO will deliver high returns. There are a few factors that you should consider before investing in NFO. They are:

• The reputation of the fund house

• Fund objectives

• Returns potential of similar funds already available in the market

• Investment objective

• Lock-in period in case of close-ended funds

Unlike an existing mutual fund scheme where you can easily check the historical performance before making the investment decision, you don’t get any past performance data for NFOs. This makes them risky and not an ideal choice for risk-averse investors.

Do read the fine print of the NFO thoroughly and match the fund objective with your investment profile to make the right decision.