New Fund Offer (NFO) & How to Invest in New Fund Offers?

NFO or ’New Fund Offer’ is a term that's often used in the world of mutual funds and investments. It refers to the offering of a new mutual fund by an Asset Management Company (AMC) or a fund house. NFOs provide investors with an opportunity to invest in a newly launched fund, offering a fresh opportunity in the market. In this article, we'll take a closer look at NFOs and their features, as well as the various benefits they offer to investors.

What Is an NFO (New Fund Offer) and Why It Matters

NFO or New Fund Offer is the introduction of a new mutual fund by an Asset Management Company or a fund house. When an NFO is launched, investors can invest in the new scheme by subscribing to its units. Typically, in India, NFOs have an offer price of Rs 10 per mutual fund unit. This helps raise funds and capital from the market to invest in stocks, bonds, and other securities. NFOs have a fixed time period within which investors can invest their money. Once the NFO period is over, regular trading resumes.

How Does an NFO Work in Mutual Funds?

Investors can purchase the units of the fund for a nominal price during the limited time period an NFO is open for investment. Once the NFO period ends, the units are traded at the net asset value (NAV) on the stock exchanges. The fund managers handling the fund then allocate this raised money to various financial assets based on the fund's objective.

What Are the Different Types of NFOs?

There are three 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 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.

Interval Funds

It falls under the category of close-ended funds, but allows for purchases and redemptions at regular intervals through the AMC, similar to open-ended funds.

What Are the Key Benefits of Investing in an NFO?

Below are some of the benefits of 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. While some focus on equity, debt, hedging risks, some focus on purely recent IPOs, only commodities or a combination of asset classes. This opens up the potential range of your investments by exploring various angles of each financial instrument or theme 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 potentially creates more wealth.

What Factors Should You Consider Before Investing in an 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, like high growth, steady and secure income, etc. This objective must be in line with your financial goals for the NFO to work well within your investment 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, you can consider investing in it.

Subscription Amount

The minimum amount you can invest in an NFO ranges between Rs. 500 and 5000. Each NFO comes with a minimum bill. If you can accommodate that without any significant adjustments to 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 analyse 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, five years, or anywhere in between. Here, you must check if the lock-in period aligns with your desired investment horizon and the need for liquidity.

How to Invest in an NFO Step by Step

Here are a few ways on how to invest in NFO:

• To invest in an NFO, you can approach any fund house or financial institution that offers this financial instrument.

• However, you would need a Demat account to invest in an NFO, which can only be opened through a registered stockbroker.

• You can invest through the ICICI Direct website. Simply log in to your account, go to the mutual funds section, click on the NFO corner, enter the required details and confirm your investment.

Who Should Consider Investing in NFOs?

New fund offers are suitable for investors who are willing to take risks and have a long-term investment horizon. It is advisable to always read the associated scheme documents before investing in the scheme.

What Are the Important Rules and Regulations Around NFOs?

The Securities Exchange Board of India (SEBI) has set out rules and regulations for new fund offers (NFOs). These include the following:

• For debt and balanced hybrid schemes, the minimum subscription amount during an NFO must be at least ₹20 crores. Other schemes need to be at least ₹10 crore.

• The fund house must ensure that at least 20 investors contribute to the NFO.

• The 20-25 rule requires that no single investor can have more than 25% of the scheme's corpus. This helps to prevent the scheme from being concentrated among a few investors. All mutual fund schemes and NFOs must comply with this rule.

• SEBI has also introduced a new rule that requires fund houses launching a scheme to invest in it. Previously, fund houses had to invest at least 1% or ₹50 lakh (whichever was lower).

What Is the Difference Between a New Fund Offer (NFO) and an Initial Public Offering (IPO)?

Let's begin by understanding the difference between NFO and IPO.

• NFOs are new mutual funds launched by Asset Management Companies (AMCs) or fund houses. On the other hand, IPOs are launched by companies to get listed on the stock exchange.

• When it comes to NFO, the Net Asset Value (NAV) is not related to the demand and supply in the market. In other words, the value of NAV does not matter here. Whereas, in the case of an IPO, the price is based on the supply and demand for that particular stock in the market.

• NFO is aligned with the scheme's objective and strategy, whereas the primary objective of an IPO is to raise capital for a company to grow and expand.

• NFO has no quotas or benefits assigned to investors. On the other hand, an IPO has quotas for different investor categories, including retail investors, Non-Institutional Investors (NIIs), and Qualified Institutional Buyers (QIBs).

Conclusion

NFOs come with no record. This makes its presence in your portfolio debatable. However, they bring compelling benefits that make it warrant a consideration. To make profitable investment decisions with NFOs, it's a great idea to understand the theme or idea the fund is centered on, evaluate the credibility of the fund house and the fund manager, and as always, go through the fine print thoroughly

FAQs about NFOs

Is it good to invest in NFO?

Investing in a new fund offer (NFO) can be a good investment option. However, being cautious is always recommended. It is important to ensure that your investment objectives and risk appetite are aligned with the scheme you choose. Also, it is crucial to research and understand the fund's objectives before investing.

What happens after buying NFO?

The investors are allotted the units after they have been purchased, provided there are no discrepancies. Investors will then be allowed to trade those units at NAV on the stock market.

Is Equity NFO Taxable?

Like all other mutual funds, NFOs are also subjected to taxation. If the equity allocation is more than 65% then short-term capital gains (STCG) is taxed at 15% whereas long term capital gains (LTCG) up to ₹1 lakh are tax-free, but any gains going beyond this are taxed at 10%.

How do I Choose an NFO?

There are various factors one needs to consider when choosing an NFO, such as the theme of the scheme, the track record of the fund house and its manager, the costs that are associated with the scheme, the tax implications and the nature of the instrument.

Can I withdraw money from NFO?

No, withdrawing money from an NFO is not possible because it involves a subscription period dedicated to acquiring units in a newly launched mutual fund scheme.

What is the amount for NFO?

The minimum investment amount for a New Fund Offer (NFO) varies based on the scheme type. For debt and balanced hybrid schemes, the required investment can range from ₹500 to ₹5,000.

What happens after an NFO period?

Once the NFO period ends, the units are traded at the net asset value (NAV) on the stock exchanges.