Click here to check out the key highlights of Union Budget 2025!
Document

Updated Income Tax Calculator

Find out how the latest Union Budget 2025 updates impact your tax liability

Calculate Now
nirmala-sitaraman nirmala-sitaraman nirmala-sitaraman nirmala-sitaraman

What is an NFO?

Updated on: Jan 27th, 2025

|

7 min read

The Asset Management Company or AMC offers investors the opportunity to invest in a newly coming mutual fund scheme through the New Fund Offer. The mutual fund house offers units to the investors in return of investment for a new mutual fund scheme through the NFO.

NFOs are quite similar to Initial Public Offerings (IPO’s) of private companies where firms offer their shares to the public for the first time. However, while the funds raised through IPOs are used to expand the business, mutual fund houses use the money pooled from the subscribers in their NFOs to purchase stocks, bonds or other securities and construct a portfolio in line with the investment objectives of the fund.

AMC’s generally launch NFOs at Rs 10 per unit of the new mutual fund scheme. The NFOs are open for subscription only for a specified time where investors can subscribe to units of the new mutual fund scheme at the offer price of NAV 10. However, investors can purchase units of the NFO even after the NFO period at a price that is usually higher / lesser than the offer price according to market conditions. 

What are the different types of NFOs?

NFOs are generally categorized as 2 types 1) open-ended funds 2) close-ended funds. 

Open-ended funds: When people typically refer to "mutual funds," they are often talking about open-ended mutual funds. Unlike closed-ended funds, where the units are traded on the stock exchange, open-ended funds allow investors to buy or sell units directly from the fund house. There is no cap on the number of units the fund can issue, which means new units can be created as more investors join or redeem their holdings.

Investors can buy or sell units of open-ended funds on any business day at the prevailing Net Asset Value (NAV) of the fund. The NAV represents the per-unit value of the fund and is determined by the performance of the underlying assets (such as stocks or bonds) within the fund's portfolio. Since these funds don’t have a set maturity date, they allow investors the flexibility to enter or exit the investment at any time based on the NAV, making them more liquid compared to closed-ended funds.

These funds offer ongoing opportunities for investment and redemption, providing ease and flexibility to investors without the limitations of a fixed number of units or a set exit date.

Close-ended funds: A closed-ended fund is a type of investment vehicle, either focused on stocks  or debt or both, where the fund provider creates a fixed number of units when the fund is first launched. This initial offering of Units is made available to the public during a period called the New Fund Offer (NFO). Once this period is over, no more new units are issued, and investors cannot buy or sell units directly from the fund house. Instead, the shares are traded on a secondary market, similar to how stocks are bought and sold on the stock exchange.

The fund has a set maturity date, after which the investments are typically liquidated, and any profits or losses are distributed to investors. While the price of the fund’s shares is typically influenced by the Net Asset Value (NAV) — the total value of the assets held by the fund divided by the number of shares — the actual market price can fluctuate based on supply and demand. This means the price of the shares could be higher or lower than the NAV, depending on investor sentiment and market conditions.

In essence, a closed-ended fund "closes" after its initial offering period, locking in the number of shares. This structure provides the fund manager with greater flexibility to manage investments without the pressure of having to deal with regular inflows or outflows of capital, which is often seen in open-ended funds. It allows the fund manager to stay focused on long-term investment strategies.

Here’s an illustrative comparison between Open-Ended and Closed-Ended Funds:

Feature

Open-Ended Funds

Closed-Ended Funds

Number of Units

No limit; units are issued as investors join.

Fixed number of units are issued at the launch.

Purchase & Redemption

Investors can buy/sell units directly from the fund at any time based on the NAV.

Investors can only buy/sell units through the stock exchange after the launch period.

Trading

Units are not traded on the stock exchange.

Units are traded on the stock exchange like stocks.

NAV Calculation

NAV is calculated daily based on the total value of the underlying assets.

NAV is also calculated, but trading price may differ based on supply and demand.

Maturity Period

No fixed maturity date. Investors can hold units as long as desired.

Has a fixed maturity period after which the fund is liquidated.

Liquidity

High liquidity since units can be bought/sold anytime during market hours.

Lower liquidity since units are traded on the stock exchange and subject to market demand.

Fund Flexibility

Greater flexibility for fund managers to adjust the portfolio based on market conditions.

Limited flexibility due to the fixed number of units and no redemption options until maturity.

Investment Strategy

Suitable for investors seeking regular investments and liquidity.

Suitable for investors willing to lock in their investment for a set period, with potential for higher returns based on market performance.

Fees and Costs

May have slightly higher fees due to more frequent transactions and management.

Fees might be lower but could incur additional costs associated with buying/selling on the exchange.

How Does an NFO Work?

The working of an NFO is based on the process of raising funds for a new mutual fund scheme. Here's a step-by-step breakdown of how an NFO functions:

1. Fund Launch and Pricing

The AMC develops a new fund scheme with a defined investment strategy like equity, debt, or hybrid. During the initial NFO subscription period, units are sold at a fixed price, usually Rs. 10 per unit. This price is standardized and remains the same throughout the offer period so that no market fluctuations affect the unit price.

2. Subscription Period

The NFO is open for a specified period, usually 2 weeks. In this time, investors can purchase units of the scheme. The subscription form is available both online and offline, and investors can apply directly through the AMC's website, mutual fund platforms, or through registered brokers.

3. Allotment of Units

Post-end of subscription period, units are distributed amongst the investors in a proportionate basis depending on the total demand at hand during the offer period. If total demand happens to exceed the number of units available, the AMC may alter the subscription size or conduct an allotment lottery.

4. Post-NFO Trading

When the NFO period ends, the units are credited to investors' accounts. For open-ended funds, units can be traded or redeemed on the exchange at the NAV determined by the AMC. Units of closed-ended funds are usually listed on the exchange after a given lock-in period, supplying liquidity.

Categories of NFOs

NFOs can be categorized according to the structure of the fund and investment strategy. These are some categories:

1. Equity-Based NFOs

Equity NFOs are mainly invested in stocks quoted in stock exchanges. These funds primarily aim for long-term capital appreciation. Equity funds are high-risk investment products, with a likelihood of high returns in the long term but highly vulnerable to market volatility. Popular investment strategies include large-cap, mid-cap, small-cap, and sectoral stocks.

Example: A technology stock or a pharmaceutical sector -focused fund

2. Debt-Based NFOs

The debt NFO will invest in the fixed income product, including the bond, debenture, and government security. This investment will be very safe, for conservatively invested individuals and for getting fixed income at periodical intervals. It will not create the situation of loss but is excellent in generating capital. Example: Corporate bond or short term government security based fund.

3. Hybrid NFO

Hybrid NFOs invest in a mix of equity and debt securities, offering a balanced approach to investing. These funds are suitable for investors who want to strike a balance between risk and return. The equity portion provides growth potential, while the debt portion offers stability and income.

Example: A fund that invests 60% in equities and 40% in bonds.

4. Thematic and Sectoral NFOs

Thematic and sectoral NFOs target specific sectors or themes like infrastructure, healthcare, or renewable energy. They invest in the companies that function in the targeted sector, and these companies aim to cash in on new trends.

Example: A green energy mutual fund which targets investing in the companies operating on solar power and wind energy.

Advantages of Investment in NFOs

Investing in an NFO presents several strategic advantages for savvy investors looking to diversify their portfolios and tap into new opportunities:

1. Early Exposure to New Investment Opportunities

NFOs provide a chance for early-stage investment, often before the fund has been fully recognized by the market. Early investment allows you to capitalize on growth potential when the fund is still in its infancy.

2. Lower Entry Price

Most NFOs charge a fixed entry price, often Rs. 10 per unit, making them an affordable gateway for new investors. The cost of entry, therefore, does not change over the offer period, allowing an investor to calculate exactly how much she will pay.

3. Diversification Across Asset Classes

NFOs can help investors diversify their portfolios by introducing them to new asset classes, sectors, or geographic regions. Thematic NFOs, for instance, offer targeted exposure to specific industries such as technology, pharmaceuticals, or agriculture.

4. Capital Appreciation Potential

NFOs—equity-based NFOs, in particular—can provide capital appreciation, which is contingent on the market conditions and the investment strategy of the fund. Early investors may be able to take advantage of the growth trajectory of the underlying assets of the fund.

5. Tax Effectiveness

Some equity-based NFOs also qualify for benefits of long term capital gains which can be effective in tax-saving for investors in the eyes. Hybrid and debt NFOs also offer the stability of regular income generation and usually lower taxes through their fixed incomes.

How is an NFO a good opportunity?

Investing in a New Fund Offer (NFO) can be a compelling opportunity for those looking to capitalize on innovative strategies and emerging market trends. NFOs often introduce fresh investment themes, such as exposure to new asset classes, indices, or commodities, which may not be available in existing funds. They offer the chance for diversification, allowing investors to spread their portfolio across different sectors or strategies. Additionally, NFOs are typically priced attractively at ₹10 per unit during the initial subscription period, providing early investors with an opportunity to secure units at a lower price before the NAV increases. Closed-ended NFOs, with their lock-in periods, can also provide stability by reducing emotional decision-making during market volatility.

However, investing in NFOs comes with its own set of risks. Since NFOs have no past performance history, it can be difficult to predict how they will perform, making them riskier compared to established funds. Furthermore, the lack of liquidity, particularly for closed-ended NFOs with lock-in periods, could be a concern for investors needing quick access to their funds. Additionally, investors should carefully review the Scheme Information Document (SID) to understand the fund’s objectives, risks, and costs, including the expense ratio, to ensure that the NFO aligns with their financial goals. As with any investment, thorough research and consideration of the fund's strategy and risk factors are essential before committing capital.

Risks Involved with Investments in NFOs

NFO investments have a great deal of risks associated with it, and here are some details about them:

1. No Prior Performance

Since NFOs are new schemes, there is no track record to gauge their performance. This makes it difficult for investors to judge whether the fund's strategy will deliver the desired results.

2. Market Risk

Equity NFOs are very sensitive to market volatility. Stock market corrections or economic slowdowns may impact the performance of the fund, thus resulting in losses.

3. Liquidity Risk

For closed-ended funds, the liquidity risk is faced by the investors. Such funds are not easily traded or sold in the market, especially when there is low demand. Even open-ended funds may face redemption issues during extreme market conditions.

4. Sector-Specific Risks

Thematic or sectoral NFOs can be highly volatile. Sector concentration exposes investors to the risk of underperformance if the targeted sector faces challenges, such as regulatory changes or technological disruptions.

How to Evaluate an NFO Before Investing?

When deciding whether to invest in an NFO, investors should consider the following factors:

1. Fund Strategy and Asset Allocation

The fund’s investment strategy should align with your financial goals and risk tolerance. Asset allocation is key—understand how the fund divides its investments between equity, debt, and other asset classes.

2. Fund Manager’s Expertise

Evaluate the experience and track record of the fund manager with other mutual funds. A good fund manager with a proven history of generating alpha is a critical factor in your decision.

3. Expense Ratio

The expense ratio is the annual fee charged by the AMC to manage the fund. A lower expense ratio translates into higher net returns for investors. Compare the expense ratios of similar funds to assess value.

4. AMC Reputation and History

This strong AMC with excellent reputation in management of mutual fund offers a greater security and can be trusted, because established ones have proven skills to manage money and risks.

5. Risk - Return Profile:

Expect appropriate returns based upon the risk reward profile of fund. If an investment promises excellent results but with massive risks, assure it fits one's investment theme.

How to invest in an NFO?

Invest in NFOs through the online or offline route as per your convenience: 

Offline route : Invest in NFOs through a mutual fund distributor or broker. The mutual fund broker helps you fill all relevant forms and submit documents when investing in the NFO. Invest in NFOs through the mutual fund broker if you prefer offline investing and information on the mutual fund launched through the NFO. 

Online Route : Invest in NFOs online through your Demat and Trading Account. Moreover, you can also invest in NFOs through mutual fund platforms where you can buy and sell units from the comfort of your home. It helps select NFOs that are open and invest in them by placing your order. 

Through the BLACK by Clear app 

Download the BLACK app on Google PlayStore to invest in NFOs.

  • Open the BLACK app, and you will see a section called Invest in NFO’s LIVE.
  • Press on this section to see the latest NFOs launched by different AMCs and are currently open for investment.
  • Touch the NFO that interests you on the screen to instantly get the offer price, launch date, last date to invest, and allotment date.
  • Check the risk, lock-in period, fund manager, exit load, expense ratio and other charges applied on mutual funds instantly to gauge the NFO.
  • It helps to study the track record of the AMC launching the NFO and similar funds before investing in the NFO.
  • Press Invest Now and choose either the Monthly SIP or the One Time option to commence your NFO investment. 
  • The minimum investment is displayed under both options, and you must choose the investment date if you opt for monthly SIP.
  • Finally, pick the preferred payment option such as UPI or Net Banking to make your payment to commence investing in the NFO. 

Things to keep in mind when investing in an NFO?

Check the expense ratio : The expense ratio is the annual fee that the fund charges to manage your investment. It’s important to check if the expense ratio is reasonable or if it’s higher than what the Securities and Exchange Board of India (SEBI) allows. A higher expense ratio means you’ll be paying more in management fees, which could reduce your overall returns. Where AMCs spend a lot of money on advertising and marketing campaigns for their NFOs. It may result in a higher expense ratio which is the cost of managing the fund compared to the existing mutual fund schemes. Moreover, investing in a mutual fund scheme with a higher expense ratio would reduce return over initially. 

No track record : AMCs pool funds from subscribers to buy stocks, bonds, or other securities in line with the fund’s investment mandate through their NFOs. It means the AMC constructs the portfolio after the NFO period, and you don’t have a track record of measuring the performance of the new mutual fund scheme launched through the NFO. 

Experts recommend investing in equity funds only after studying their performance over a few market cycles against peers and the benchmark. It is better to settle for an existing mutual fund with the same investment mandate and a track record of performance over some time rather than risk your money in a new mutual fund scheme. 

NFO is not cheap at Rs 10 : Many people believe NFOs are a bargain investment as they are launched at a NAV or price of Rs 10. However, the returns delivered by an existing mutual fund and the new scheme launched through NFO would depend on the performance of stocks in their holdings over time. 

The NFO is not cheap because it was launched for Rs 10. The AMC has yet to build the portfolio of the new mutual scheme, and you don’t have a track record of measuring the fund’s performance. It helps to optimise for an existing mutual fund scheme that has done well against the benchmark and peers and has a lower expense ratio as it is already a proven performer over time. 

Check the Scheme Information Document (SID)

Invest in the NFOs only after doing the research. It helps to look through the Scheme Information Document (SID), which displays the investment strategy, fund manager profile, asset allocation pattern and benchmark index. Check the statement of additional benefits (SAI), which shows you extra information about the AMC.

It helps to pay close attention to the investment thesis of the mutual fund scheme, which you get from the Scheme Information Document. Investors can gauge the investment objectives of the new mutual fund launched through the NFO. It also helps to study where the mutual fund plans to invest your money depending on the type of fund. 

Look at the stock selection approach of the mutual fund before investing in an NFO of an equity mutual fund scheme. It helps you understand why the AMC has invested in the stock for its mutual fund scheme portfolio. 

Benefits of investing in an NFO

Invest in a unique theme: In new mutual fund schemes through NFOs exposes you to a novel investment idea or theme, which may do well over time. For example, an AMC may launch an NFO with the ESG (Environmental, Social, and Governance) theme. Investors can invest in the NFO if it matches their investment objectives and risk tolerance and if research shows ESG themes to be profitable over time. 

  1. Diversifying Your Portfolio: When markets experience frequent fluctuations, it can cause your investments to be concentrated in one area, making your portfolio riskier. For example, if the stock market falls, a portfolio heavily invested in stocks could lose significant value. NFOs can help reduce this risk by offering a chance to invest in different types of assets or industries that you may not already have exposure to. By including NFOs in your portfolio, you can spread your investments across a broader range of sectors, helping to balance the risks and reduce the overall chance of big losses.
  2. Attractive Pricing: One of the main reasons to invest in NFOs is their price—usually ₹10 per unit when the fund is first launched. This price can be appealing compared to the potential higher cost of the fund’s units once the NFO closes and starts trading on the market. If you wait too long, you might end up paying a higher price for the same investment after the NFO period ends, so acting early can secure the fund at a better value.
  3. The Advantage of a Lock-In Period (for Closed-Ended Funds): Some NFOs are "closed-ended," meaning your money is locked in for a set period, usually 3 to 5 years. While this might seem like a disadvantage if you want easy access to your money, it can actually be a positive feature. A lock-in period helps prevent emotional decision-making during market downturns—many investors panic and sell their investments during a market crash. With closed-ended NFOs, you won’t be able to redeem your investment until the fund matures, allowing the fund manager to focus on long-term growth without worrying about sudden withdrawals.
  4. Access to Information: Every NFO comes with a detailed document called the Scheme Information Document (SID), which explains the fund's investment goals, strategies, and risks. By carefully reading the SID, you can gain a thorough understanding of what the fund aims to achieve and whether it aligns with your financial goals. This transparency helps you make an informed decision about whether to invest.

Opportunity to add an investment your portfolio lacks

You may invest in an NFO of a new mutual fund if it offers exposure to an investment your portfolio lacks. For instance, you could consider an NFO in index funds with exposure to foreign stock market indices if you want to add foreign stocks to your portfolio. 

Flexibility

NFOs in close-ended mutual fund schemes benefit from flexibility as investors cannot exit easily post the NFO period. The fund manager can hold on to funds even if the stock market crashes, thereby aiding better investment decision making. However, open-ended mutual fund schemes are impacted by large inflows or outflows from the fund, especially during extreme volatility in the stock market. 

Takeaways

  • Invest in NFOs with unique investment ideas or themes. 
  • Invest in NFOs if you need a particular investment which your portfolio lacks.
  • Don’t invest in NFO just because the AMC offers it at Rs 10
  • Earning listing gains from NFOs is impossible as the AMCs will create more units if there is excess demand from subscribers. 
  • The mutual fund builds the portfolio of the new scheme launched through NFO after the offer period.

 

Can't get yourself started on taxes?
Get a Cleartax expert to handle all your tax filing start-to-finish
Help and support
close
Loading Chat ...
Chatbot LogoChatbot Button

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption