Like stocks are listed on exchanges through an IPO (Initial Public Offering), new mutual fund schemes are launched through an NFO. Read this post to know more.
There are hundreds of mutual fund schemes available in India. But have you ever wondered how these schemes came into existence? Through New Fund Offers or NFOs.
Understanding what is NFO, how NFO works, and the various types of NFO available in India is crucial to your journey of becoming a better mutual fund investor. Let us understand all of this in detail-
What is New Fund Offer (NFO)?
A New Fund Offer or NFO is a first-time subscription offer of an asset management company for its newly launched mutual fund scheme. The main objective of NFOs is to raise capital for the new fund scheme and attract investors. The AMC uses the funds collected during the NFO to purchase securities per the scheme's objectives.
How Do NFOs Work?-
In the stock market, you have Initial Public Offerings (IPOs), where companies raise capital from the public in exchange for company shares. Similarly, AMCs use a limited duration NFO to raise capital for investing in securities. In return, investors are allotted scheme units, depending on the offer price (generally ₹10 per unit) and the investment amount.
Once the NFO is over, the scheme is officially launched and investors can purchase scheme units at its NAV if it is an open-ended scheme. Close-ended schemes have fixed maturities and don’t allow buying and selling of fund units after the NFO.
The NAV (Net Asset Value) of the scheme on launch depends on the fluctuations in the purchased securities. In many cases, the NAV of the schemes on launch is higher than its offer price during the NFO.
What are the Different Types of NFOs?
New Fund Offers (NFOs) are divided into 3 categories based on the scheme's structure. They are-
Open-Ended Schemes
These mutual fund schemes allow regular buying and selling of the fund units after the NFO.
Click Here to know What are Open Ended Schemes?
Close-Ended Schemes
No buying and selling of the fund units are allowed once the NFO is over.
Interval Schemes
These are close-ended schemes but allow buying and selling at fixed intervals, like annually or semi-annually.
Why NFO is a Good Investment Opportunity?
NFO in a mutual fund can be an excellent investment opportunity as it allows investors to purchase units of a new scheme at the offer price.
However, investors should not invest in an NFO just because it is available at a low price of ₹10 per unit, hoping to benefit from the listing gains like IPOs. The NAV of the scheme on the listing will depend on the performance of the securities held in the scheme's portfolio.
Who Should Invest in NFOs?
Experienced investors can consider investing in NFOs if the new scheme matches their financial objectives, investment horizon, and risk appetite. Ensure you read all the scheme-related documents to avoid investing in a scheme that doesn't match your requirements and expectations.
Many mutual fund schemes have an exit load. After subscribing, if you realize the plan is not ideal for your portfolio, you'll have to pay an exit fee for redeeming the units prematurely in such schemes. Moreover, if the scheme is close-ended, you'll only be allowed to sell the scheme units after maturity.
What are the Things Investors Should Consider Before Subscribing to an NFO?
Now that you know NFO meaning and how they work, let us quickly go through the factors you should consider before subscribing-
Scheme Objectives
The objectives will help you understand the investment strategy, portfolio construction, liquidity, riskiness, and expected returns of the scheme.
Subscription Amount
NFOs generally have a minimum subscription amount ranging from ₹100 to ₹5,000.
Investment Cost
You should also check aspects like exit load and Total Expense Ratio (TER) of the scheme and compare it with other schemes from the same category.
Click Here to know what is Expense Ratio?
AMC Reputation
Prefer subscribing to NFOs from reputed AMCs that have been in the business for 5-10 years or more. You can also check the past performance of some of the other schemes offered by the AMC to get a better understanding of their capabilities.
Investing in Mutual Funds Through an NFO
NFOs offer a great opportunity to become early investors in a mutual fund scheme. But remember that NFOs are not IPOs. Unlike IPOs, the listing NAV of the NFO is not influenced by demand and supply.
So, only consider subscribing to an NFO if the scheme is an ideal addition to your investment portfolio.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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