New Fund Offer (NFO): Definition, Types, and Benefits

Understanding mutual funds can be challenging, particularly when encountering terms like New Fund Offer (NFO). This blog seeks to simplify NFOs by explaining what they are, their various types, and how they work. It will also cover the potential benefits and key factors investors should consider, along with a step-by-step investment guide. Whether you are experienced or new to mutual funds, this guide will provide the insights needed to make informed choices about NFOs.

Table of contents

What is NFO?
Types of New Funds Offer (NFO)
How does an NFO work?
Benefits of investing in NFOs
How do you invest in NFO?
Who should invest in a new fund offer?
Things to keep in mind before investing in NFO
How to invest in NFOs?
What happens after NFO?

What is NFO?

A new fund offer (NFO) is a mutual fund scheme made available for investment for the first time by a mutual fund house or Asset Management Company (AMC). The aim of launching an NFO is to raise capital from the public to purchase securities (stocks or debt instruments) and pay for administrative tasks.

In other words, an NFO is a first-time opening of a subscription offer of a mutual fund scheme. An NFO usually lasts for 10 days and up to 15 days for all schemes except ELSS and allows investors to buy units of the scheme at face value which can be Rs. 10 per unit or Rs. 100 per unit or Rs. 100 per unit.

Types of New Funds Offer (NFO)

After having attained a grasp of NFOs, let’s take a closer look at their structural classification. Among the three types of NFO mutual funds – open-ended, close-ended, and interval plans – which one should you go in for? Let’s help you decide.

Open-ended NFOs

Open-ended funds are for investors who want to invest or redeem units at any point in time as there is no fixed maturity date. This means investors can buy or sell units at the scheme's prevailing net asset value (NAV) and get liquidity at any point in time. They can invest in these schemes either through SIP or lumpsum modes. In short, open-ended NFOs are ideal for investors seeking flexibility as they can enter or exit the scheme anytime.

Close-ended NFOs

Close-ended NFOs are launched for a fixed tenure only. Here, investors can buy or sell units only during the initial offer period. These funds are for those investors who want to invest for a specific period. For redemption, funds must be listed on the stock exchange first else investors will get the money at the scheme maturity. Also, close-ended NFOs do not permit SIP investments. Additionally, closed-ended funds come with a fixed tenure of around 5-7 years from the investment date.

Interval plans

Interval plans are a mix of open-ended and close-ended schemes. These NFOs allow investors to transact within a specified timeframe, usually annually or semi-annually. Thus, with interval plans, investors can purchase and redeem scheme units when the AMC allows. This is by way of having a Specified Transaction Period where the investors can either invest in the scheme or redeem from the scheme.

How does an NFO work?

NFOs are launched by mutual fund houses to raise money from investors before the scheme becomes available for trading. Here's how it works:

The mutual fund house announces a new mutual fund, detailing its objectives and the assets it will invest in. This marks the start of the NFO period.

During the NFO period, investors can buy fund units at a fixed price, typically starting from Rs. 10 per unit, which makes it an attractive investment opportunity.

The subscription period for NFOs usually lasts a few weeks. Investors can purchase fund units at the initial offer price during this time.

Once the subscription period ends, the NFO closes, and further investments cannot be made at the initial offer price.

After raising the required capital, the fund begins investing in various assets according to its investment objectives. Investors can then trade NFO fund units on the open market.

It's important to note that after the NFO period, the price of NFO units can fluctuate based on the fund's performance.

Benefits of investing in NFOs

Just like other ongoing schemes, the chief advantages of investing in an NFO are low initial investment and a chance to leverage future performance. Here are some more benefits:

Accessible

NFO units are offered at a face value and the units are allocated accordingly. These are accessible to investors who want to start off with a low initial investment. For example, if you are investing Rs. 10,000, you will be allocated 1,000 units in the NFO scheme with a face value of Rs. 10 each.

Flexibility

NFOs are handled by expert fund managers who make all fund related decisions. Thus, investors can be secure in the knowledge that their money is being handled in the best way possible. Open-ended NFOs

Diversification

NFOs can also help investors diversify their portfolio by including newer strategies. This way, you can potentially tap into a new avenue of returns, especially if your current investments are not performing.

Future growth

With effective management, NFOs can help you meet your financial goals by giving you a chance to capitalise from the fund’s potential growth over time. You can also invest in a specific sector if it has potential for future growth as and when an AMC launches that NFO.

How do you invest in NFO?

You can invest in an NFO directly through the mutual fund house that has launched the scheme, a registered mutual fund distributor or a Registrar and Transfer Agent. You can also invest through intermediaries such registered investment advisors, aggregators or certain banks. You can invest both online and offline through these routes.

Who should invest in a new fund offer?

Once an investor learns about “what is NFO in mutual funds”, they can enter a mutual fund scheme at the face value mentioned by the Fund House. However, the lack of past performance record can make NFOs a risky investment. Both these factors simply indicate that investors with a moderate to high-risk appetite can consider investing in an NFO. Moreover, novice investors can also invest in NFOs of mutual fund schemes offered by reputed AMCs.

Things to keep in mind before investing in NFO

Before investing in a New Fund Offer (NFO), consider the following:

Investment objective: Ensure the fund's objectives align with your financial goals and risk tolerance.
Fund strategy: Understand the NFO's investment approach, sector focus, or unique strategies, which could affect return potential and risk.
Track record of the fund house: Evaluate the fund house's past performance in managing similar funds.
Costs: Check the expense ratio, entry/exit loads, and other charges, which can impact returns.
Market conditions: NFOs launch in various market cycles, so assess if it's an optimal time for the strategy.

How to invest in NFOs?

There are two modes for investing in an NFO of a mutual fund: online and offline. You can go for the option that best suits your needs.

Investing in NFOs – Offline Mode: You can invest in NFOs by meeting distributors or brokers in person. All you need to do is fill out the required forms and sign the necessary documents to invest in a New Fund Offer.
Investing in NFOs – Online Mode: Investing in NFOs has never been easier as now you can invest through your Demat and online trading account. Another option is to go to any established mutual fund platform and create an online account to invest in NFOs right from the comfort of your home. The only thing you need to do is login and place an order for your chosen NFO of a mutual fund.

What happens after NFO?

NAV fluctuations: Similar to existing funds, the NAV of NFO units will fluctuate based on market conditions and the performance of the underlying assets.

Regular SIP investments: After the NFO period, investors can opt for Systematic Investment Plans (SIPs) in the NFO or continue with lumpsum investments, depending on their financial planning strategy.

Conclusion

Make sure to do your research thoroughly and seek the advice of a professional before venturing into an NFO in mutual funds. A careful approach, coupled with thorough knowledge, is the best way to grow your wealth.

FAQs:

Is it good to invest in an NFO?

New Fund Offers can be a preferred investment option to invest in mutual funds since they are available at face value. However, you should also bear in mind that the lack of past record makes NFOs a riskier investment than existing mutual fund schemes. You must consider investing in an NFO only after carefully examining the scheme-related documents and issuing AMC.

What are the benefits of NFO?

Investing in a New Fund Offer gives you a chance to diversify your portfolio by investing in new schemes and emerging industries, or strategies that do not form a part of the existing investments held by the you.

When can I withdraw my NFO?

For open ended funds, you can exit any time subject to exit load if charged by the scheme. For closed ended funds, you can either sell it on stock exchange provided there is liquidity, or you can wait till maturity. You can find this information in the scheme-related documents.

How much should I invest in NFO mutual funds?

NFOs have a minimum subscription amount ranging from Rs.5,000 to Rs.10,000 which you must invest in when you subscribe to the scheme. You can invest any amount that you can spare considering your risk appetite, time horizon and surplus available for investment. However, it is prudent to exercise caution and keep your long-term financial goals in mind before investing in an NFO.

Is it safe to invest in NFO?

Just like any other investment option, investing in an NFO, carries inherent risks. The performance of an NFO depends on factors such as the quality of the fund's investment strategy, the experience of the fund manager, the underlying assets in the portfolio, and market conditions. Thus, it is important to carefully evaluate these factors before investing in an NFO. You can consider seeking the help of financial advisor to make an informed decision.

How does an NFO differ from an IPO?

An NFO involves the issuance of units of a mutual fund scheme, while an IPO involves the issuance of shares of a company. There is no IPO in case of a mutual fund scheme.

What are the benefits of investing in an NFO?

NFO can provide exposure to unique investment strategies or asset classes that may not be available in other existing funds.

How much should I invest in an NFO?

The amount you should invest in an NFO depends on lots of factors such as financial goals, risk appetite and financial objectives. Diversifying your investments in the early stage can be a wise strategy to avoid huge risks.

What is the ideal investment horizon for investing in mutual fund scheme?

There is no definite answer to this. However, it is recommended to hold mutual fund schemes for a longer period. This is especially true for funds that are unique or new. This will allow time to test the performance of a fund that does not have a past track record.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.