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When a fund house introduces a new mutual fund scheme, it goes by the name New Fund Offer (NFO). It works on a first-come-first-serve basis for the general public to subscribe.

This article covers the following:

  1. How does New Fund Offer work?
  2. Why NFO can be a good opportunity?
  3. Who opts to Invest in a New Fund Offer?
  4. Things to Consider before investing in NFO
  5. 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 an offer price. This is usually fixed at Rs 10. Once this tenure expires, the investors would be able to purchase the units of the fund at the offer prevailing at the time. Usually, NFO subscribers have found to experience significant gains after listing.

 

2. 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 they get listed on the exchange. Moreover, 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.

 

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3. 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 also find the NFOs a value for money proposition and subscribe it. Hence, the fund houses can achieve their goal of increasing their Asset Under Management (AUM).

3. Things to consider as an investor

a. Fund House Reputation

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

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. In simple words, it means that by reading the offer document, potential investors should be able to understand what the fund manager is going to do with their 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 8,000 mutual fund schemes in the Indian mutual fund arena. So if you come across an NFO, then read the fine print carefully to understand the fund theme. You need to ensure that the fund house is offering something unique. 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.

d. Returns

If you are interested in an NFO, then it is wise to analyse the past returns. The offer document may or may not touch upon this information. But, you need to set an expected rate of return in mind and analyse the fund accordingly. In case you have already invested your money in the fund, then go for a quarterly review for, say first three years. You may compare the mutual fund performance with the index and peer funds to understand the returns trend.

e. Risk factor

Investing in NFOs might 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 benchmark or metrics, it will be difficult for you to predict the fund’s performance. Whether the fund emerges in flying colours or goes down in drain remains a mystery.

f. Cost of investment

The overall cost involved in investment is one of many criteria that influences your potential returns. Even though there is no entry load, some NFOs may charge exit loads if you happen to redeem units before completing the tenure. If the lock-in period happens to be longer than your investment horizon, then your returns may take a hit due to exit loads.

Expense ratio – annual fee for the fund house for managing your money – is another factor. Please check if the expense ratio is lower or equal to what SEBI mandates. If not, then 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 5,000. As an investor, you can make this one of your main shortlisting criteria. If the minimum subscription amount is higher than what you can spare, then can re-evaluate your decision. You may instead go for a systematic investment plan (SIP), in an existing high-performing scheme, which is an affordable and convenient choice.

h. Investment Horizon

Some NFOs may come with a lock-in period of three years to five years. In that scenario, you might have to stay invested for the entire tenure. Is that in line with your investment horizon and goals? After investing, you cannot redeem units before maturity. You might even have to pay a pre-exit fee (exit load) for this. So, if an NFO happens to be longer than your investment horizon, it’s better to avoid such a 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:

– Sign in at cleartax.in

– Enter your personal details regarding the amount of investment and period of investment.

– Get your e-KYC done in less than 5 minutes.

Pick a suitable plan from the hand-picked mutual funds.

 

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