What are the Features and Benefits for Applying Upcoming NFO

Introduction

Several oversubscribed IPOs in recent times show the surge in the average investor interest in Initial Public Offerings (IPO). But it's not just IPOs that are raining this season. The distant relative of IPO is also taking the markets by storm. We are talking about the underrated NFO.

What is an NFO?

An NFO stands for New Fund Offering. It is a new mutual fund scheme offered by the Asset Management Companies (AMC) or fund houses. NFOs are created to raise funds to purchase stocks and securities to help the fund houses accomplish their goals.

Just like an IPO, you can subscribe to an NFO also only during a fixed period of few days. If you choose to invest during the offer subscription period, you can enjoy a low offer price per unit. Typically in India, NFOs have an offer price of Rs 10 per mutual fund unit. You can also invest in the concerned NFO scheme after the subscription period expires. However, the price after expiry is usually more than the initial offer price. After the NFO subscription period, their NAV is calculated by adding the scheme's total assets and dividing them by the total units issued to the investors. Since NFOs are Mutual Funds, they are relatively safer than stocks as they comprise a diverse portfolio of multiple stocks, securities, bonds, etc.

Types of NFOs

There are two broad types of Mutual Fund NFOs:

Open-Ended

These NFOs are highly liquid. You can enter and exit them at any time as there is no fund lock-in period. You can easily encash the unit purchased.

Close-Ended

These NFOs come with a specified lock-in period, such as three years, five years, etc. You can exit such an NFO only on maturity.

Factors to Consider while Investing in NFO

As an NFO is a brand new fund with no history of its performance, it brings risk. Hence you should assess a couple of factors before you put your money here,

Objectives of the Fund

Each NFO is created with a particular objective: high growth, steady and security income, etc. This objective must be in line with your financial goals for the NFO to fit well in your portfolio

Comparison with another Fund offering same Benefits

Since there are many existing Mutual Fund schemes, you should compare the terms of the new NFO with those in the market already. Evaluate the 'new' aspect of this offering – if it seems attractive enough, put your money on it.

Subscription Amount

The minimum amount you can invest in an NFO ranges between Rs. 500 – 5000. Each NFO comes with a minimum bill. If it can accommodate without any significant adjustments in your financial plan, you may consider it.

The Reputation of the AMC or Fund House

Each Fund house comes with a reputation. 'Has it delivered what it promised in the past? How is its existing range of MF products faring? How has the operating history been?' Answers to these questions will help you analyze the track record of the fund house.

The Expertise of the Fund Manager

The NFOs Fund Manager is the orchestrator of your fund. Whether your NFO will rise or fall ultimately depends on the Fund Manager's expertise, experience, and execution skill.

Lock-in Period

Some NFOs come with a lock-in period. It could be a year or five or anywhere in between. Here, you must align your desired investment horizon and liquidity with the lock-in period of the fund.

Investment Benefits of an NFO

Profit Generating Capacity

The entry price for NFO is just Rs 10 per unit, but after their subscription period expires, the NAV price per unit mainly scales up, giving you good profits. If the NFO is open-ended, you could also sweep off the gain and exit the fund or stay invested if you want, depending on your financial goal,

Discovery of New Investment Strategies

NFOs are new curated offerings that come with unique benefits and structures. Every additional NFO increases the range of Mutual Fund products by introducing new theme-based and strategy-based variants and filling in gaps. While some focus on equity, debt, hedging risks, some focus on purely recent IPOs, only commodities or a combination of asset classes. That will allow you to invest by exploring various angles of each financial instrument and create a tailor-made portfolio.

Creates a Disciplined Investment Approach

NFOs that come with a fixed lock-in period may have more to gain once the fund matures. The NFO can achieve its objective as investors do not withdraw the funds before the maturity period. This offers dual benefits to you – creates investment discipline and creates more wealth.

How to Invest in an NFO?

The basic thumb rule to invest in any financial security or stock or fund is through a Demat Account. You can open a Demat Account only through a registered stockbroker. ICICI Direct is a trustworthy registered broker that can easily and quickly open a Demat Account for you. It is also equipped with a hard-core research team that can guide you with the most profitable investment opportunities in the market.

Additional Read: Eligibility Criteria to Open Demat Account

Conclusion

NFOs come with no record. This makes its presence in your portfolio debatable. However, their benefits still outweigh the cons. To make profitable investment decisions with NFOs, it's a great idea to go through the fine print thoroughly it comes with and checks if they will match with your financial goals.

Disclaimer:

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism.  The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.