A new fund offer gives you the opportunity to buy the units of an upcoming mutual fund scheme at an initial price. These offers allow you to explore new investment strategies or take advantage of emerging market trends. They typically come with a specific investment goal, suiting different risk levels and investment preferences. 

Enlighten yourself about new fund offers, their types, benefits, and associated details. It will help you understand the funds' strategy and potential returns before investing. 

What is NFO in Mutual Fund?

NFO in mutual funds stands for “New Fund Offer". It is an investment scheme launched by a fund house or Asset Management Company (AMC) to raise capital for a new mutual fund from investors. It is introduced in the market first to allow the public to subscribe to a newly launched scheme at a low initial price. 

According to SEBI, NFOs usually remain active for a limited time, between 15 to 30 days in the market. You can buy the fund units at a subscription price, which is usually set at Rs. 10 per unit. This lets you invest in various stocks and bonds through a single investment.

NFOs not only just give you an opportunity to invest in emerging sectors but also help you diversify your investment portfolio. 

Who Launches NFOs?

Various Asset Management Companies (AMCs) launch NFOs when they plan to provide a new category of funds to investors. With the issuance of NFOs, AMC raises capital in order to purchase securities from the market and build an investment portfolio.

Types of NFO

New fund offers are mainly categorised into three main types on the basis of the mutual fund scheme’s structure and features:  

• Open-Ended New Fund Offers

These NFOs are issued to the public to raise initial capital to buy securities. There is no limit to the number of units you can buy during the NFO initiation period. Since you can enter or exit the scheme anytime as per your choice, open-ended NFOs are highly liquid. Moreover, you can also buy the funds’ units when the NFO period is over at the prevailing Net Asset Value (NAV). 

• Close-Ended New Fund Offers 

Close-ended NFOs have a fixed maturity period, and they are issued for a fixed time period. After the NFO period ends, you cannot make further investments in these funds. You can redeem your investment after the end of the maturity period. According to the regulations of SEBI, all closed-end funds must be listed on an exchange, which allows for early exits. 

• Interval New Fund Offers

Interval NFOs blend features of both open-ended and closed-ended funds. They operate as closed-end funds but permit investors to buy and sell through the asset management company's designated windows at set intervals, which could be either annually or semi-annually, enabling transactions within predefined time frames.

How Does an NFO Work?

NFOs are usually launched by Mutual Fund Houses to raise money from investors before the scheme is accessible for trading. Go through the following steps to learn how an NFO works:

1. The AMC, or the fund house, announces the launch of a new mutual fund. It will provide details, including the scheme's objective, investment objective, and the various assets it aims to invest in. With this announcement, the NFO period starts.
2. Within the NFO timeframe, you can buy the fund units at a fixed price which usually starts from Rs. 10 for a unit. This makes it a luring investment option.
3. Usually, the subscription period for NFOs is just a few weeks. During this period, you can buy the units of the fund at its initial offer price.
4. The NFO gets closed after its subscription tenure ends. After this, you cannot make any further investments at the initial offer price.
5. After raising the capital, the fund starts operating. They start investing in various assets according to their pre-planned investment objectives. Moreover, you can trade NFO fund units on the open market. 

It is important to note that post-NFO the price of the NFO units can fluctuate based on the performance of the fund. 

Benefits of New Fund Offer

The following are the NFO mutual fund benefits which you can avail after investing:

• No Entry Barrier

NFO units are often priced at a fixed rate, as low as Rs. 10 per unit, making them affordable for investors with smaller budgets.

• Save on Expenses

During the NFO phase, there are usually no fees charged with the scheme, giving you a cost advantage initially. However, after the NFO period, the expense ratio comes into effect.

• Expert Management 

NFOs are handled by experienced fund managers, who make investment decisions based on the fund's goals and market conditions. It helps in increasing your chances of reaching your investment targets.

• Portfolio Diversification

Some NFOs offer innovative investment themes, helping you to diversify your investment portfolio in different ways. It helps in managing your risks and optimising your investment returns.

• Chance for Growth

As NFOs are new funds yet to be introduced in the market, you can benefit significantly during the initial period. With effective management, the scheme can grow over time, potentially increasing your investment returns. 

How to Invest in an NFO?

Investing in NFOs involves a simple and easy procedure. There are two ways through which you can invest in NFOs, which are as follows:

• Via a Broker

When you want to invest in a new fund offer (NFO), you can invest with the help of a broker. Make sure the broker you choose is authorised. They will assist you in completing all the paperwork for an NFO application. Investing through a broker has benefits like getting services at your doorstep and receiving information about the fund's future performance.

• Via an Online Trading Account

Another way to invest is through an online trading account, which is convenient if you are investing in shares and mutual funds already. You can use the same account for NFO investments. Buying and selling NFO units can be done online. Your online trading account also helps you track your investments' net asset value.

Important Points to Consider Before Buying NFO

Before buying the mutual funds of NFO, you must consider the following points to make informed investment decisions:

• Goal of the Fund

Before buying a new fund offer you must understand the fund’s objective. Check whether their investment objective aligns with your financial goals and risk appetite.

• Investment Horizon

NFOs come with a lock-in period and varying investment horizons that may not match your financial goals. Hence, choose an NFO based on when you want to exit your scheme and which scheme will help you fulfil your life goals. 

• Expected Returns

You should do a comparison of the potential returns of similar existing mutual fund schemes in the financial market. It will help you understand if a specific NFO is worth investing in. 

• Fund Manager 

Analyse the fund managers’ past experience and performance before performing NFO investment. Examine the funds which they are currently managing.

• Risks Involved 

You should take into account different risks like liquidity, market, and credit risks linked with NFO schemes. Choose an NFO based on your risk appetite, i.e., choose a high-risk, high-return fund only if you are an aggressive investor. 

Difference Between NFO and IPO

Here is a table showcasing the key differences between NFO and IPO: 

Final Words

Overall, new fund offers are an accessible avenue for investors to explore new investment strategies and grow their wealth. NFOs aim to achieve long-term capital growth by primarily investing in stocks, bonds and related instruments of different companies. Nevertheless, before making a decision, you must do thorough research, understand the fund's investment goals, and assess the fund manager's expertise.