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New Fund Offer (NFO) refers to a mutual fund scheme which is introduced by the fund house for the first time for subscription by the general public.

This article covers the following:

  1. How does New Fund Offer work?
  2. Who opts to Invest in a New Fund Offer?
  3. Things to Consider as an Investor
  4. How to Invest in Mutual Funds?

 

1. How does New Fund Offer work?

In a new fund offer, the opportunity to subscribe to the scheme is available only for a limited period. In this period, the investors may purchase units of the mutual fund scheme to subscribe the NFO at a special price. This price is known as the offer price and is usually fixed at Rs 10. Once the limited period expires, the investors would be able to purchase the units of the fund at the prevailing offer. Usually, after listing, NFOs have found to experience significant gains.

With the help of an NFO, the fund house raises money from the public to purchase securities like equity shares, bonds, etc. from the market. NFO is cheaper than the existing funds just because it is new in the market. They look identical to IPOs, in which shares are offered to the public for the first time before getting listed on the exchange. Moreover, a whole range of marketing efforts that go into their promotion, makes it too-good-to-miss opportunity. However, it not might be the case always. You need to put in your judgment and wisdom before settling for one.

 

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2. Who opts to invest in a New Fund Offer?

Most investors seek mutual fund investment opportunities when the markets are at a peak. Whether it is gold or real estate, they desire to enter the market assuming that it will rise further. But they also prefer lucrative investments that are available at a cheaper rate. The asset management companies (AMCs) try to capitalize on this psyche of investors. This is why people tend to go after the seemingly cheaper NFOs.

The investors also find the NFOs a value for money proposition and subscribe it. Hence, the fund houses are able to achieve their goal of increasing their Asset under Management (AUM).
 

3. Things to consider as an investor

a. Fund House

If an investor wants to invest in an NFO, then it is better to do a background check on the fund house which is going to manage the scheme altogether. Ensure that the fund house has a substantial history of operating in the mutual fund industry of say at least 5-10 years. It will help to analyze the kind of performance that the fund house delivered during the market rally and slump. If the fund house has a good track record, then you may consider the NFO to perform as promised. However, in case you are not much satisfied with the fund house, then it would be better to go for a mutual fund scheme offered by a known fund house.

b. Fund Objectives

The fund objectives spell out the asset allocation, riskiness, expected returns and liquidity among other things. It helps you to develop a perception about the viability of the NFO. An NFO needs to clearly explain its investment process which it’s going to carry out for the given investment horizon. Simply put, it means that by reading the offer document, you should be able to understand that what the fund manager is going to do with your money. If investors are unable to make out objectives of the NFO, then it shows weaknesses in the investment process.
 

fund objectives
 
 

c. Theme of New Fund Offer

There are more than 8000 mutual fund schemes already thriving in the mutual fund arena. So, going for an NFO has to be a well-thought-out decision. If you come across an NFO, read the scheme related document carefully to understand the theme of the NFO. You need to make sure that the fund house is offering something unique. The investment theme has to be something which is not being offered by the existing schemes. Moreover, the scheme needs to have that sustainability to work well for a fairly long period of time. However, if you find that the new fund offer is a mere repetition of existing strategy and isn’t a viable proposition, then it’s better to invest in the already well-performing mutual fund scheme.

d. Return

NFOs are not all that bad. Some can be multi-baggers that will help you in wealth accumulation. If you are interested in an NFO, then it would be wiser to go through the returns aspect. The offer document may or may not touch upon these details but you need to draw a mental picture. You need to set an expected rate of return in mind and analyze the fund accordingly. In case you have already invested your money in the fund, then go for a quarterly review for say first 3 years. You may compare the performance with the index and peer funds. Unless you are extremely convinced about the performance, you may explore the existing funds.

e. Risk

Investing in NFOs may involve certain risk. In case of existing funds, you can readily check the asset allocation and the portfolio. But for an NFO, you won’t be able to assess how the fund manager intends to utilize your money. It is because the asset manager cannot allocate the funds before he collects the entire money. Additionally, NFOs will not have a performance history. Without any benchmark or metrics, it will be difficult for you to predict how it is going to perform. Whether the fund emerges as a winner or a loser remains a mystery.

f. Cost

The overall cost involved in investment is one area which needs to be examined properly. It is because these criteria will determine the number of returns which you are going to take home at the end of the day. You need to know that investing in NFOs involves a lot of charges in different forms. Even though there is no entry load, some NFOs may charge exit loads in case you redeem your units before completion of the lock-in period. If the lock-in period happens to be longer than your investment horizon, then your returns may take a hit due to exit loads.

The other important consideration is the expense ratio. It is a fee that the fund house charges annually to manage your money as long as you stay invested. SEBI has already mandated the upper limits of expense ratio for equity funds and debt funds. So, if an NFO is offering a similar strategy at a lower expense ratio, go for it. Else leave it and stick to the existing schemes.

g. Minimum Subscription Amount

NFOs usually specify a minimum subscription amount for the investors. It may range from Rs 500 to even Rs 5000. As an investor, this can be one of the important shortlisting criteria. If the minimum subscription amount is quite higher than what you are planning to invest in one go, then you need to relook your decision about investing in NFO. You may instead go for a systematic investment plan (SIP), in an existing high-performing scheme, which happens to be much affordable and convenient.

h. Investment Horizon

Before finalizing on an NFO, you need to keep the investment horizon and goals in mind. NFOs may come with a lock-in period of say 3-5 years. In that scenario, you might have to stay invested for the entire tenure of  3 years or 5 years. After investing, you cannot redeem units before maturity. You might even have to pay exit load for this. So, if an NFO happens to be longer than your investment horizon, it’s better to avoid such scheme.
 

4. How to invest in Mutual Funds?

Investing in Mutual Funds is made paperless and hassle-free at ClearTax. Using the following steps, you can start your investment journey:

Step 1: Sign in at cleartax.in

Step 2: Enter your personal details regarding the amount of investment and period of investment.

Step 3: Get your e-KYC done in less than 5 minutes.

Step4: Invest in your favorite mutual fund from amongst the hand-picked mutual funds.

 

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