New Fund Offer – NFO of Mutual Funds

A New Fund Offer (NFO) is how an asset management company launches a new fund on a first-subscription basis for financing its purchase of securities.

How Does New Fund Offer work?

In a new fund offer, the opportunity to subscribe to the scheme is available only over a limited period. The investors may purchase units of the mutual fund scheme during the pre-defined period and subscribe to the NFO at an offer price. This is usually fixed at Rs 10. Once the tenure expires, the investors would be able to purchase the fund units at the specified price. NFO subscribers, in general, have been able to generate noticeably better gains post-listing.  

Why NFO is a good opportunity?

With the help of an NFO, the fund house raises money from the public to purchase securities such as equity shares, bonds, and so on, in the market. NFO is cheaper than the existing funds as it is new to the market. They are comparable with the Initial Public Offering (IPOs), in which the public can purchase shares before getting listed on a stock exchange. Also, a whole range of marketing efforts that go into their promotion makes it a too-good-to-miss opportunity. However, sometimes, you need to put in your judgment and wisdom before settling for one.   

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 capitalise on this mentality of investors. This is why people tend to go after the seemingly less expensive NFOs. The investors find the NFOs a value for money proposition and subscribe to them. Hence, the fund houses can achieve their goal of increasing their Asset Under Management (AUM).

Things to consider as an investor

Fund House Reputation

If an investor wants to invest in an NFO, it is of utmost importance to do a background check on the fund house. Ensure that the fund house has a strong history of operating in the mutual fund industry, say at least 5 years to 10 years. It will help you analyse the kind of performance that the fund house has delivered during market ups and downs. If the fund house has a good track record, then the NFO might perform as promised.

Fund Objectives

The fund objectives spell out the asset allocation, riskiness, expected returns, and liquidity, among other things. It helps you develop a perception of 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. In simple words, it means that reading the offer document should help potential investors understand what the fund manager is going to do with their money. If investors are unable to make out the objectives of the NFO, then it shows weaknesses in the investment process.

Theme of New Fund Offer

There are hordes of mutual fund schemes in the Indian mutual fund sector. So it is advised to read the fine print carefully to understand the fund theme when you come across an NFO. The investment theme must be sustainable and something not provided by the existing schemes. However, if you find that the new fund offer is a mere repetition of a current strategy, then it is probably not a viable option.

Returns

If you are interested in an NFO, then it is advised to analyse the past returns. The offer document may or may not touch upon this information. You can set an expected rate of return against which you can analyse the fund accordingly. In case you have already invested your money in the fund, you can consider reviewing it quarterly, say for the first three years. You can compare the mutual fund’s performance with the index and peer funds to understand the returns trend.

Risk factor

Investing in NFOs could be risky. Unlike existing funds, where you can readily check the asset allocation and risks involved, NFOs don’t have a performance history. And, you won’t be able to assess how the fund manager intends to utilise your money. Without any benchmarks or metrics, it will be difficult for you to predict the fund’s performance. Whether the fund emerges in flying colours or goes down the drain can remain a mystery.

Cost of investment

The overall cost involved in investment is one of many parameters that decide your potential returns. Though there is no entry load, some NFOs charge exit loads if you happen to redeem units before the completion of the tenure. If the lock-in period is longer than your investment horizon, then your returns can be affected on account of the exit loads. The expense ratio – the annual fee charged by the fund house for managing your money – is another crucial parameter. It is advised to check if the expense ratio is lower or equal to what SEBI mandates.

Minimum Subscription Amount

NFOs usually specify a minimum subscription amount for the investors. It may range from as low as Rs 500 to Rs 5,000. As an investor, this can be your primary criteria for shortlisting your possible investments. If the minimum subscription amount is higher than what you can spare, re-evaluating your options would be a wise decision. In such cases, you can consider opting for a systematic investment plan (SIP), in an existing high-performing scheme, which is an affordable and more convenient choice.

Investment Horizon

NFOs also come with lock-in periods ranging from three to five years. In such cases, you will be required to stay invested for the entire tenure. Ensure that your investments are in line with your investment horizon and goals. Once you have subscribed to a mutual fund scheme, you may not be able to redeem your units before maturity. In some cases, you could also be charged a pre-exit fee (exit load) for the same. It is advised to re-evaluate your options in case the preferred NFO happens to be longer than your investment horizon.

How to Invest in Mutual Funds?

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