Navigating New Fund Offers (NFOs): Opportunities, Risks, and Considerations

What is the New Fund Offer (NFO) of Mutual Funds?

Individual investors have started to invest more in mutual funds in order to diversify their portfolios. By investing in mutual funds, they also seek professional management of their investments. New Fund Offer (NFO) is one of the key events in the life cycle of mutual funds. If you are looking forward to exploring new investment opportunities and diversifying your portfolio then NFOs are designed for you.

What is a New Fund Offer (NFO)?

A New Fund Offer (NFO) is an initial subscription which is offered when a new scheme is launched by an asset management company (AMC). During this period, you can subscribe to the units of mutual fund at the offer price, especially which are set at ₹10 per unit in India. You can start trading after the funds are launched as NFO period is a limited-time window.

Meaning of NFO

NFO usually refers to the introductory phase whenever a new mutual fund scheme is offered to the public for purchase. Further, this phase enables you to buy into the fund at its inception and before it begins regular operations and its Net Asset Value (NAV) starts to fluctuate depending on the change in value of underlying investments on account of market conditions.

Types of New Fund Offers

NFOs are usually divided into two types mentioned below:

Open-Ended Funds: This type of fund enables you to enter and exit the fund at any time after allotment of respective MF units. The NAV of open-ended funds is calculated on a daily basis which provides you with liquidity and flexibility.

Close-Ended Funds: This fund offers you a fixed maturity period which usually ranges from three to seven years. You can subscribe during the NFO period but you can only redeem their units upon maturity, you also have the option of selling them on stock exchanges where they are listed but the liquidity through this route may also be limited.

How does an NFO work?

During the NFO period, the concerned AMC usually promotes the upcoming scheme to attract investors in the market. Details like the fund's objectives, investment strategy etc. are outlined in the scheme information document. If you are planning to invest in NFOs then you need to apply for units of the fund by filling out an application form and paying the offer price. There are various digital platforms too, which allow seamless application in NFOs. Bank clients can also apply for NFO schemes digitally through the ‘Mutual Funds’ section in Bank’s bob World mobile app.

Once the NFO period has been concluded, the AMC will allocate units to you based on the amount that you invested and the offer price. The performance of the fund post-NFO depends on how well the AMC manages the investments and navigates market conditions.

How to Invest in an NFO?

Below given are some of the steps for investing in an NFO:

Investing in an NFO involves the following steps:

1. Research: You will need to understand the fund’s objectives, strategies and the potential risks that are involved by reading the KIM, SID and other promotional materials provided by the AMC.

2. Application: To apply for the NFO, you will have to fill up the application form during the NFO period which can be done digitally.

3. Payment: If you want to purchase then you need to pay the offer price for the number of units. You can make the payments through bank transfers, cheques or other electronic methods.

4. Allotment: After the NFO period ends, you will be allocated the units of the scheme depending on the total amount that you have subscribed.

Advantages and Disadvantages of an NFO

Advantages:

1. Early Entry: If you invest during the NFO period then it allows you to enter the fund at the ground level and at the same time you will also benefit from the fund’s growth from inception.

2. Diversification: NFOs can be leveraged to meaningfully diversify your portfolio and at the same time these may entail innovative investment strategies and themes.

Disadvantages:

1. Unproven Track Record: You might find it challenging to assess past performance of the NFO schemes as they lack performance history, unlike existing funds.

Is It Good to Invest in an NFO?

If you are planning to invest in an NFO then it can turn out to be a good option if it aligns with your investment goals and risk appetite. NFOs, at times, might offer you with good opportunities and diversification benefits and especially if the fund follows an innovative investment strategy. However, you should carefully consider lack of performance track record. It is thus quite crucial for you to evaluate the fund’s objectives, the AMCs reputation and the fund manager’s experience before investing. You can gain insights into whether the new fund offers any distinct advantages by comparing the NFO with existing funds and having similar investment strategies. Also, investments in Equity based NFOs should be undertaken with a long term view and at a minimum, your investment horizon for such investments should be 3-5 years.

Conclusion

New Fund Offers (NFOs) provide you with an opportunity to invest in new mutual fund schemes at their inception. On one hand, the NFOs offer you unique investment opportunities and diversification benefits but at the same time they also come with certain risks and disadvantages, such as the lack of a track record. By doing careful research and consideration you can make informed decisions that align with your overall investment strategy.