Home Learn What are New Fund Offerings (NFOs)? Learn NFO Market Returns & Benefits

What are New Fund Offerings (NFOs)? Learn NFO Market Returns & Benefits

What are New Fund Offerings (NFOs)? Learn NFO Market Returns & Benefits
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New Fund Offers (NFOs) are popular investment options in the share market. In this blog, we’ll explore the meaning of NFOs, the types of NFOs, and the benefits associated with investing in them. Additionally, we’ll discuss the latest NFO trends in the Indian investment market, common myths, and how to invest in them.

What is NFO in the Share Market?

​​When an asset management company launches a new mutual fund, it raises capital through a new fund offer (NFO). Similar to an initial public offering (IPO), an NFO includes details about the portfolio. Such as the shares to be purchased, the types of securities, and the fund manager.

Investors can buy units of the mutual fund at the subscription price, typically Rs.10 per unit, during the NFO period. Both open-ended and closed-end funds are launched through NFOs, and they are available for a limited time. After the NFO period, these mutual funds are traded in the market based on their net asset value (NAV).

New Fund Offers in India

According to SEBI regulations, an NFO can remain active for up to 30 days. The subscription price is Rs.10 per unit, and the collected funds are used to purchase publicly traded company securities.

Once the NFO closes, the mutual fund units are traded based on the NAV. Buying mutual fund units during an NFO can benefit investors as they acquire units at a low cost, potentially leading to substantial capital gains when the mutual fund starts trading in the market.

How Does an NFO Work?

A New Fund Offer is the introduction of a new mutual fund scheme introduced by an asset management company. During the NFO period, investors can buy units at a starting price, usually around Rs. 10 per unit. The fund officially starts once the NFO period ends, and investors can trade units at the Net Asset Value (NAV) on stock exchanges.

Professional fund managers allocate the capital collected by following the fund’s goals and focusing on the fund’s investment objectives. Thus, NFOs allow investors to join a new fund with a small initial investment. However, it’s important to research and consult a financial advisor before doing so.

Difference Between NFO and IPO

Aspects of ComparisonMutual Fund NFOCompany IPO
DefinitionIntroduced by mutual fund companies to launch new schemes.Involves companies issuing shares to get listed on stock exchanges.
Price DeterminationNAV is fixed and not influenced by market demand and supply.Share prices are determined by market demand and supply during the IPO process.
Importance of PricingNAV value is not crucial; investment decisions focus on scheme objectives and strategy.IPO pricing is critical as it affects investor interest and company valuation.
PurposeAims to align with specific investment objectives and strategies of the mutual fund scheme.Aims to raise capital for company growth and expansion.
Investor CategoriesNo specific quotas or benefits for different investor categories.Typically, it has quotas for retail investors, non-institutional investors (NIIs), and qualified institutional buyers (QIBs).
InitiativeLaunched by mutual fund houses to introduce new fund ideas.Initiated by companies to raise funds from the public, either through Fresh Issues or Offer for Sale.

Similarities Between an IPO and an NFO

Now that we have understood the differences between an IPO and an NFO, let’s explore their similarities

  • Fundraising: Both IPOs and NFOs are avenues for raising capital. IPOs allow companies to raise funds by selling shares to the public for the first time, while NFOs enable mutual funds to gather money from investors for a new scheme by selling units.
  • Market Entry: Both introduce new securities into the financial market. In the case of IPOs, the company issues shares; for NFO mutual funds, the units of the newly launched mutual fund scheme are issued.
  • Investor Participation: Both allow individuals to participate in the financial markets. With IPOs, they can invest in individual companies directly, while NFOs offer diversified exposure through professionally managed portfolios.
  • Costs Associated: Both processes involve marketing, administrative, legal, and compliance costs. These costs affect the final offer price for investors in both IPOs and NFOs.

Factors to Consider Before Investing in NFOs

Investing in New Fund Offers can appeal to investors seeking profits. However, not every NFO guarantees substantial gains. Evaluating certain key factors before investing is crucial:

  • AMC Reputation: Assess the asset management company’s track record with previous funds. A positive track record can indicate reliability and performance consistency.
  • Objectives Clarity: Understand the NFO’s objectives regarding risks, returns, asset allocation, and liquidity. Clarity on these aspects helps align investment goals.
  • Potential Returns: Compare potential returns with existing funds in the market to gauge profitability. Ideal returns can influence the decision to invest in the NFO.

What are the Different Types of NFOs?

The New Fund Offers can be classified into three categories based on the investment structure and features. Let’s have a look at them

  • Open-Ended: Investors may invest in and redeem their investments in these schemes anytime. Investors are typically permitted to join or quit the plan as they like at the applicable NAV. They are also subjected to the exit load, if applicable, even after the initial NFO is withdrawn.
  • Closed-Ended: These schemes are created to collect a pool of money for investments in securities. After this, they can be closed to new transactions, restricting access to them until the maturity term has passed. Nonetheless, the fund companies advertise these closed-ended schemes on the stock exchanges, and if you choose to exit the scheme, you may trade these units on the exchange.
  • Interval Funds: These types of mutual funds combine features of open-end and closed-end funds. These NFO funds offer periodic intervals, such as quarterly or semi-annually, during which investors can buy or sell shares. Outside of these specified intervals, the fund typically restricts redemptions, creating a form of liquidity management.

How to Choose Which NFO is Best for Investment?

Investors can consider the following fundamentals in a new fund offer to select the best NFO for investment:

  • Investment Theme: Start by understanding the investment theme of a mutual fund scheme, particularly in a New Fund Offer (NFO). The Scheme Information Document (SID) of an NFO details the scheme’s goals, such as high returns or capital appreciation, and the strategies to achieve them. Examine how the scheme plans to allocate its assets—whether it focuses on equity, debt, money market instruments, or a hybrid approach.
  • Fund House Track Record: Evaluate the fund house’s track record and market reputation. Consider its history, the number of mutual fund schemes it offers, and their performance. Choosing NFOs from established fund houses is generally safer, but newer fund houses can also offer high-performing schemes.
  • Fund Manager Track Record: Assess the fund manager’s track record, as they directly manage your investment. Look at the schemes they currently manage, their past performance, and their overall experience in the mutual fund industry. This information is crucial when considering an NFO, as the fund manager’s expertise significantly impacts the scheme’s success.
  • Associated Costs: Be aware of the costs linked to NFOs, such as Entry Load and Exit Load. Some fund houses charge an exit load if you redeem your investment before a specific period. Understanding these costs is crucial before investing in any NFO.
  • Tax Implications: Mutual fund earnings fall into two categories: Dividends and Capital Gains. Dividends are subject to a 10% Dividend Distribution Tax (DDT), which the fund house deducts. Capital gains are taxable for the investor, with different tax treatments depending on the type of mutual fund.

However, it is important for investors to consult a financial advisor and conduct thorough research into any NFO fund before investing.

How to Invest in NFOs?

Investing in NFOs can be similar to investing in any other mutual fund. Investors can invest in New Fund Offers through their stockbrokers or online through the asset management company’s website. Here are the steps to invest in NFOs:

Investors typically use a broker for offline NFO investments but can also directly approach the AMC office. The AMC will guide them through the process.

  • If you are going to an authorised broker, contact the broker, submit the form, and check the other details.
  • You can also show the folio number for that AMC, and then the system will present most of your data.
  • Complete the offline form, verify the details, and submit it to the broker after signing it. Also, please attach the cheque for the NFO payment.

Investing in NFOs Online

If you already invest in stocks and mutual funds through an online trading account, you can also use the same account to invest in New Fund Offers (NFOs). This lets you buy and sell NFO units online and track their Net Asset Value alongside other investments.

Who Should Invest in NFOs?

  • New Fund Offers can appeal to investors seeking exposure to unique investment opportunities or specialised sectors not readily available in existing mutual funds. 
  • NFOs may be suitable for investors who are comfortable with the higher risk associated with investing in newly launched funds and are willing to take a long-term view.

Important Rules Around NFO

The Securities and Exchange Board of India (SEBI) regulates New Fund Offers (NFOs) to ensure transparency and protect the interests of investors. Here are some important rules and guidelines set by SEBI for NFOs:

  1. The minimum subscription amount during the NFO must be at least Rs. 20 crore for debt-oriented and balanced hybrid schemes and at least Rs. 10 crore for other schemes. 
  2. Additionally, the funds collected during an NFO must come from at least 20 investors, with no single investor contributing more than 25% of the total corpus. This “20-25 rule” ensures investment diversity and applies to all mutual fund schemes at all times.
  3. The fund house launching a new scheme must also invest in it. Previously, this investment had to be at least 1% of the NFO amount or Rs. 50 lakh, whichever was lower. However, SEBI now requires fund houses to increase their investment based on the scheme’s risk level. Fund houses may need to invest more in equity funds than safer options like liquid or overnight funds. SEBI has yet to provide details on implementing these new requirements.

What Happens After NFO?

Once a new scheme’s NFO period closes, the mutual fund company typically allows the issuance of units within five days. In cases where allotment doesn’t occur—perhaps due to incomplete Know-Your-Client (KYC) requirements or errors in application forms—the fund house refunds the application money.

Investors can purchase units for open-ended mutual fund schemes even after the NFO period. Open-ended schemes permit investors to enter or exit anytime, providing ongoing accessibility.

However, not all mutual fund schemes allow you to buy units after the NFO period. Therefore, close-ended funds, for example, only allow unit purchases during the NFO period and do not remain open for investors to enter or exit at their discretion. Consequently, investment in close-ended schemes is confined to the specific NFO duration.

What are the Benefits of Investing in an NFO?

New Fund Offers offer several benefits that make them attractive investment options. Let’s explore some of these NFO benefits in more detail.

  • Potential for Returns: One of the primary benefits of investing in NFOs is the potential for returns. Since NFOs are yet to be in the market, the investors can benefit from the initial phase of the fund’s growth. If the fund performs well, investors can benefit from the potential for good returns.
  • Lower Entry Barriers: Another benefit of NFOs is that they often have lower entry barriers than other investment options. Some NFOs may have a minimum investment amount as low as Rs. 500, making them accessible to a broader range of investors.
  • Diversification Opportunities: NFOs may offer investors the opportunity to diversify their portfolios. Asset management companies often launch NFOs with a specific investment objective. These objectives reflect a particular sector or theme. 

What are the Limitations of Investing in an NFO?

Investing in a New Fund Offer (NFO) can be tempting due to the potential for good returns and lower entry barriers, but it’s essential to be aware of its limitations before making any decisions. Here are some key downsides:

  • Lack of Track Record: The biggest drawback is the lack of a historical performance record. Without it, you can’t assess the fund’s ability to deliver on its promises. Instead, you’re taking a leap of faith in the fund manager’s vision and investment strategy.
  • Higher Risk: Due to the lack of track record and unproven strategy, NFOs generally carry higher risk than established funds. Market volatility and unforeseen events can significantly impact their performance, and you might experience higher losses.
  • Limited Diversification: In certain cases, NFOs with unique themes or niche strategies might not offer much diversification. This can be detrimental if the chosen theme or sector underperforms the broader market.
  • Liquidity Constraints: Open-ended NFOs typically offer some liquidity, but close-ended options lock your investment for a fixed period. This can be inflexible and create challenges if you need to access your capital before the lock-in period ends.

Common Myths Surrounding NFOs

  1. Myth 1: NFOs Are Not Like IPOs: An NFO (New Fund Offer) differs significantly from an IPO (Initial Public Offering). In an IPO, a company raises funds from the public to achieve specific goals. Investors get detailed information about the company’s financial health, business operations, and growth prospects, which helps them assess whether the IPO price is fair. If demand for the stock is high, the price may rise upon listing. In contrast, an NFO involves an asset management company collecting money from investors to invest in a portfolio of securities (like stocks, bonds, or government securities) based on a specific strategy. At the NFO stage, the fund holds no stocks, so investors cannot judge whether the initial ₹10 unit price is a good value. This price is merely a starting point for unit allocation.
  2. Myth 2: NFOs Are Not Cheap: A low NAV at launch, such as ₹10, does not mean an NFO is cheap. The value of an NFO depends on the performance of its underlying investments. The real value measure is the fund’s NAV growth over time, not its initial price.
  3. Myth 3: New Doesn’t Mean Better: Don’t assume all NFOs offer something new or better for your portfolio. Many NFOs do not add significant value and might replicate existing options that are already available and potentially superior. It’s uncommon to find NFOs that stand out from the existing funds in their category.

To Wrap It Up…

In conclusion, a New Fund Offer marks the initiation of a mutual fund scheme, allowing investors to subscribe to units at the initial offer price. While the NFO period is a limited window for entry, the investment landscape extends beyond, especially for open-ended schemes that permit ongoing transactions. As always, investors must do their own research and consult their financial advisors before investing.

Frequently Asked Questions About New Fund Offers

1. What is a new fund offer in the share market?

A New Fund Offer or NFO is the first subscription offering for a new mutual fund scheme launched by an asset management company.

2. What is the NFO period?

An NFO runs for a set period, usually from a few days to weeks. During this time, investors can buy units at the offer price. After the NFO ends, the scheme becomes a regular mutual fund.

3. Which is the best NFO to invest in?

Predicting the definite success of a fund, especially a new one, can be challenging. Yet, investors can consider a lower expense ratio and assess the performance of the investment company’s other funds before investing in an NFO. However, conducting thorough research and consulting a financial advisor before investing in NFOs is also essential.

4.  How do I choose an NFO?

Investors can explore newly launched funds by researching their investment objectives, reading press releases from different investment companies, or visiting NFO-related news sites. However, it is also important to consult a financial advisor before investing.

5. Is it possible to withdraw money from an NFO when it’s open?

No. It is not possible to withdraw from an NFO when it is open because it’s the phase where investors purchase units in a new mutual fund scheme. However, investors can exit later by selling the units on the stock exchange or waiting until the end of the maturity period.

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