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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 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 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 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 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 Reputation

If an investor wants to invest in an NFO, then a background check on the fund house is must. 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 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. 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 in the Indian mutual fund arena. So if you come across an NFO, read the fine print carefully to understand the fund theme. You need to make sure that the fund house is offering something unique. The investment theme must be sustainable and something not offered by the existing schemes. However, if you find that the new fund offer is a mere repetition of existing strategy, then it is probably not a viable proposition.

d. Returns

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 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 mutual fund performance with the index and peer funds to understand the returns trend.

e. Risk factor

Investing in NFOs may involve certain risk. 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 utilize your money. 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 of investment

The overall cost involved in investment is one criteria that determines your potential returns. Even though there is no entry load, some NFOs may charge exit loads in case you redeem your 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, 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, 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 say 3-5 years. In that scenario, you might have to stay invested for the entire tenure of  3 years or 5 years. 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 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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