Are you tired of the same old investment options? Ready to spice things up with a New Fund Offer (NFO) In this article, we'll break it down for you in a fun and easy-to-understand way.
An Asset Management Company (AMC) issues a New Fund Offer (NFO) whenever it launches a new mutual fund scheme. It functions much the same way as an initial public stock offering.
The NFO is a process by which the public can purchase mutual fund units at an introductory price. Continue reading to find out more about the benefits and how to invest in one.
What Is a New Fund Offer?
The New Fund Offer is an introductory mutual fund unit sale offered by an asset management company (AMC) when it introduces a new mutual fund scheme. By SEBI guidelines, AMCs are not allowed to issue NFOs for identical items. It allows the company to raise funds from investors and reinvest them in various types of assets.
How Do New Fund Offers (NFOs) Work?
For a limited period following their launch, NFOs are available for subscription. Individuals can invest in the mutual fund scheme at the offer price during this period.
According to SEBI regulations, new fund offers can remain active for up to 15 days. Additionally, the offer price for each unit of a new fund offer is generally fixed at Rs. 10 a unit. As soon as an NFO mutual fund closes, existing and new investors are required to purchase units at the applicable Net Asset Value (NAV).
Types of New Fund Offerings (NFOs)
The following are the different types of NFO funds:
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Open-Ended Funds
The name open-ended funds implies that they are always available for investment and redemption. In other words, once the NFO period has ended, you can join or leave the scheme anytime.
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Close-Ended Funds
If you invest in a closed-ended mutual fund scheme, you cannot enter or exit the scheme after the expired NFO period. However, you can redeem the units after the maturity period has expired, which usually lasts three to five years.
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Exchange-Traded Fund (ETF)
Through NFO, AMCs offer exchange-traded funds, which are mutual funds whose units can be traded on the stock market. These funds invest in multiple types of securities, including equity and bonds, and are considered highly liquid.
Benefits of Investing in an NFO
Here are some benefits of investing in an NFO of a mutual fund scheme:
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Flexibility
The NFO offers both the AMC and the investor flexibility in terms of timing. The manager may hold a portion of the investor’s funds to invest later if the timing is not optimal for the investor. However, the market is in its ultimate condition.
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Expense Ratio
Because it is still relatively new to the market, the NFO of a mutual fund scheme will have a lower expense ratio. Thus, it will cost you a lower overall expense ratio than other funds.
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New Asset Classes
You will learn about new themes and asset classes with great growth potential. You will also diversify your portfolio. Suppose the theme of the mutual fund is aligned with your investment objectives. In that case, you can invest early to maximise your returns.
How to Invest in a New Fund Offer?
There are two ways to invest in a New Fund Offer.
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Broker
An Authorised broker can help you complete the necessary formalities to invest in an NFO. This is the most straightforward method of investing in an NFO.
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Online Trading Account
You must have an online demat account if you are already an investor. You may subscribe to the NFO through that account.
Why Is NFO a Good Investment Option?
In addition, NFO investment helps to diversify your portfolio. Investing in a new mutual fund scheme is profitable for you. With proper industry research, you can determine if investing in a particular NFO is an appropriate option.
Differences Between NFO and IPO
- In the first place, an IPO is the initial offer made by a company to the public for the subscription of its shares. At the same time, an NFO is the first public offering of units in a mutual fund scheme just launched.
- In the case of mutual fund NFOs, retail investors are not entitled to any special benefits as in the case of IPOs.
- A fund’s usage in an IPO is very important, as it determines whether the IPO money will add value to the investor. The NFO determines the level of the market and the valuation at which the fund will invest.
- When it comes to NFOs, most of the fund NFOs are priced at Rs.10, which indicates the company’s perceived value.
- A company’s IPO price may be set at a discount to the issue price or a premium, depending on market conditions, news flow, and demand. However, NFOs typically open with a discounted NAV.
- NFO has an indicative unit value, whereas forces of supply and demand determine the IPO price.
Things to Keep in Mind While Investing in NFOs
Investors should consider the following factors before investing in NFO mutual funds:
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The Nature of Financial Instruments
To understand the nature of the underlying financial instruments, investors should refer to the offer document that an asset management company files with SEBI. This document contains all the essential information about the mutual fund scheme.
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Fund Objective
Investors can also find the fund’s objectives in the offer document, which provides key details, such as asset allocation, expected returns, liquidity, and so on.
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Fund House Reputation
Also, investors should check the background of the fund managers, especially in the case of actively managed mutual funds, before deciding whether to subscribe to any of their NFOs.
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Investment Cost
Investors must pay a minimum subscription amount to invest in a new fund offer per the terms and conditions. This is one of the most vital factors to consider when deciding whether to invest in NFO mutual funds.
Conclusion
It is possible to enjoy substantial returns from investing in an NFO. However, there is no certainty that these funds will deliver substantial returns, just as with any other market-linked investment. Before subscribing to a new fund offer, you must consider various important factors, such as the scheme’s objectives, the returns generated by similar funds, etc.
