What is an NFO? All you need to know about new fund offer.

How does a new fund offer work?

When an AMC wants to start a new mutual fund scheme, it markets the new scheme with the initial offer price, launch date, and closing date. Investors can subscribe to the offer by investing their money and the AMC utilises the corpus to build the scheme’s portfolio, purchasing assets based on the scheme’s investment strategy.
All types of mutual funds – namely, open-ended mutual funds, close-ended mutual funds, ¬are offered for the first time through an NFO. However, additional units under existing schemes can be offered only through open-ended mutual funds.

• Table of contents

1. How does a new fund offer work?
2. Types of New Fund Offers
3. Who should invest in a new fund offer?
4. Things to consider as an investor
5. Benefits of Investing in an NFO
6. FAQ

Types of New Fund Offers

There are two types of NFOs in mutual funds:

Open-ended Mutual Funds: The AMC floats new scheme for subscription during the NFO period. These mutual fund schemes can also be purchased on a constant basis after the scheme is open for subscription and redemption. The AMC can offer NFOs for new schemes. You can purchase and sell them on their launch date and thereafter once it is open on an ongoing basis.

Close-ended Mutual Funds: The AMC issues units which are available only during the NFO. You can only purchase them when they are launched before the closing of the launch period. Once the NFO period is over, no fresh units are issued in such funds.

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 consider as an investor

Your financial goals: You should invest in mutual funds only after analysing your financial goals. By checking your financial goals and existing liabilities, you will be in a better position to decide the investment amount and investment horizon for the NFO.

Objective of the mutual fund scheme: You must comprehend all the scheme-related information before subscribing to an NFO. From asset allocation to expected returns and everything in between, you must ensure that you understand all the intricacies before investing your hard-earned money.

Actual cost of investment: Mutual funds or other investment options don’t work like piggy banks, wherein you put in Rs.100 and you get Rs.100 when you smash it. This is because your piggy bank does not charge you an entry load, exit load, or management fee. Thus, barring the price of the piggybank, you don’t lose anything when you crack open your nest egg. However, AMCs have to pay the fund managers and their teams in addition to carrying out other tasks like scheme recurring expenses. These expenses are handled using investors’ money, which means that they are ultimately deducted from your returns. So, always keep an eye on the expense ratio of a scheme including the annual fee, exit load and so on.

To sum it up, NFOs can be considered as an option to get started with mutual funds. It is crucial to keep in mind the associated risk with a new scheme and the unique terms and conditions (such as the minimum subscription amount and lock-in period, if any, investment strategy and objective) before investing.

Benefits of Investing in an NFO

A few benefits of investing in an NFO are mentioned below:

Diversify your portfolio: New mutual funds are launched to capitalise on the promise of rapidly developing markets or technologies. By making investments in these NFO mutual funds, investors can diversify their portfolios and pursue the chance to be among the first investors in emerging industries in order to build long-term wealth.

New asset classes: You are introduced to a new asset class via NFO, which may have growth potential. You might want to invest early for long-term gain if you discover that the fund's objective is in line with your investment objectives.

Be ahead: Most fund companies launch NFOs to enter an emerging market or technology. This keeps you as one of the first investors in the scheme.

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.

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 an 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.