What are New Fund Offerings (NFOs)? Learn NFO Market Returns, Full Form, Formula & Investment Benefits
NFO is an investment option that is gaining popularity in the share market. The NFO full form in share market is New Fund Offers. 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 and how to invest in them.
What is NFO in Mutual Funds?
New Fund Offer or NFO meaning in share market are the mutual funds that are launched for the first time in the market. They offer an opportunity to buy units of the fund at its initial stage. The launch of NFOs helps raise capital from the market and invest in securities such as stocks, bonds, etc. Professional fund managers manage these funds, making investment decisions on behalf of the investors.
New Funds Offer in India
In recent years, India has seen a rise in the number of NFOs launched in the investment market. Investors are showing more interest in NFOs due to their potential returns. The Indian investment market has seen a preference shift, and investors are now looking for opportunities beyond traditional investments.
Recent Trends in the Indian Investment Market
The Indian investment market has seen a surge in the number of New Fund Offers launched by asset management companies. Recent trends suggest investors favour equity NFOs due to their good returns. Investors are also looking for sector-specific NFOs focusing on niche sectors such as pharma, technology, and infrastructure.
The Indian investment market has witnessed significant growth in recent years.
According to a report by the Association of Mutual Funds in India, the Indian mutual fund industry’s AUM grew by 41% in the last financial year, reaching a record high of ₹34.3 trillion. Increasing investor awareness about the benefits of NFO mutual funds has contributed to this growth.
How Does NFO Work?
A New Fund Offer (NFO) is the introduction of a new mutual fund scheme introduced by the Asset Management Company (AMC). During the NFO period, investors can buy units at a starting price, usually around Rs 10 per unit. Once the NFO period ends, the fund officially starts, and investors can trade units at the Net Asset Value (NAV) on stock exchanges.
Professional fund managers allocated the capital collected during the NFO, following the fund’s goals. Thus, NFOs allow investors to join a new fund with a small initial investment. However, it’s important to do your own research and/or consult a financial advisor before investing.
How is a Mutual Fund NFO Different from a Company IPO?
Mutual fund NFO and Company IPO are two different concepts.
- Mutual fund companies introduce NFOs to launch new schemes, while IPOs involve companies issuing shares to get listed on stock exchanges.
- In an IPO, market demand and supply determine share prices, unlike NFOs, where demand and supply do not influence the NAV. IPO pricing is crucial, but NAV value doesn’t matter.
- The goal of a mutual fund NFO aligns with the scheme’s specific investment objectives and strategy. Conversely, an IPO aims to raise capital for the company’s growth.
- IPOs have quotas for different investor categories like retail investors, Non-Institutional Investors (NIIs), and Qualified Institutional Buyers (QIBs). NFOs, on the other hand, do not have such quotas or benefits.
Who Launches IPOs & Who Lunches NFOs?
In the context of an IPO, a company initiates it to raise funds from the public. There are two main types: Fresh Issues, for raising new funds, and Offer for Sale, where existing investors sell their stake. In contrast, NFOs, often launched by mutual fund houses, introduce new fund ideas, usually coinciding with market peaks.
Similarities Between an IPO and an NFO
Let’s have a look at the similarities between IPO and NFO.
- 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 (New Fund Offers) 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 NFOs, 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 NFO
There are significant aspects that you should consider before investing in NFO.
- NFO Exit Options: In the event of an open-ended scheme, one may leave the scheme anytime. A few lock-in plans, such as equity-linked savings schemes, may be an exception; you can exit from these schemes at any time after the lock-in period is over. If the exit occurs before the exit load period, it may attract an exit load. In the event of a closed-ended scheme, exits are not permitted until the maturity term is over. Yet, the fund companies advertise these closed-ended schemes on the stock markets, and if you choose to leave the plan, you may swap these units on the exchange.
- Investment Horizon: Before committing to the NFO investment depending on the offering, it is recommended to consider your personal investment horizon.
- Risk Appetite: Do look at the asset classes the NFO is looking to invest in since they should match your degree of risk. For instance, an NFO that invests in small and mid-cap equities assets may not be the best choice for you if you are a risk-averse investor.
- AMC’s Reputation: Evaluating the goodwill of the Asset Management Company (AMC) issuing the NFO is essential. Analysing AMC’s past financial performance of previously issued funds provides valuable insights into its reliability and reputation.
- Objectives: Examining the objectives outlined in the NFO prospectus is crucial for understanding risks, expected returns, asset allocation, and liquidity. Investors should carefully consider the purpose behind the fundraising and the fund manager’s strategy before deciding to invest in the NFO.
- Expected Returns: Prior to investing, comparing the potential returns of similar funds currently available in the market is advisable.
Why is NFO a Good Opportunity?
Once the units are publicly traded, investors may favour NFO mutual funds because they can yield substantial returns. When investors invest in NFO mutual funds, they may effectively enhance portfolio diversification, leveraging the well-recognized diversification benefits of mutual funds. Furthermore, NFO mutual funds enable investors to participate in innovative funds concentrating on emerging sectors that may have become public after an IPO. One of the most significant reasons why NFO mutual funds can be a good opportunity is because of their value for money.
What are the Different Types of NFOs?
The New Fund Offers (NFO) 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 and are also subjected to the exit load, if any, even after the initial NFO is withdrawn.
- Closed-Ended: These schemes are created to collect a pool of money for investments in securities, after which 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 fund. 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?
To select the optimal New Fund Offering (NFO) for investment, it’s advisable to consider the following factors:
- Clearly Define Investment Objectives: Identify whether your aim is long-term growth, income generation, or a balanced approach.
- Thoroughly Research the Fund: Analyse the NFO’s investment strategy, portfolio composition, and, if available, historical performance to ensure alignment with your investment goals.
- Evaluate Risk Tolerance: Assess your risk tolerance as NFOs can vary in risk profiles. Choose an offering that matches your risk comfort level.
- Assess Fund Manager Expertise: Investigate the experience and track record of the fund manager. A seasoned manager can significantly influence investment returns.
- Consider Expense Ratio: Opt for an NFO with a reasonable expense ratio as lower expenses result in more of your investment being allocated to assets.
- Examine Exit Load: Check for any exit load charges, which are fees incurred for early withdrawals. Minimise exposure to high exit loads if you anticipate needing to access your investment sooner.
- Seek Asset Diversification: Look for diversification within the NFO’s portfolio to spread risk across various asset classes.
- Evaluate Fund House Reputation: To ensure reliability and trustworthiness, consider the reputation and credibility of the fund house managing the NFO.
- Review the Offer Document: Carefully read through the NFO’s offer document for comprehensive details and disclosures regarding the fund’s structure and objectives.
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 they can also directly approach the AMC office. The AMC will guide you through the process.
- If you are going to an authorised broker, contact the broker and submit the form, and check the other details.
- You can also show the folio number for that AMC, and then the system will pull out most of your data.
- Complete the offline form, verify the details, and then submit it to the broker after signing it. Also, please attach the cheque for the NFO payment.
Who Should Invest in NFOs?
New Fund Offers (NFOs) can be appealing to investors seeking exposure to unique investment opportunities or specialised sectors that are not readily available in existing mutual funds. Investors comfortable with the higher risk associated with investing in newly launched funds and willing to take a long-term view may find NFOs suitable.
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:
- The Asset Management Company (AMC) must provide a detailed offer document that includes all relevant information about the mutual fund scheme. This document must be filed with SEBI before the NFO is launched.
- At least 20 investors must subscribe to the NFO, and no single investor can hold more than 25% of the corpus (fund’s total assets). If these conditions aren’t met, the NFO will be automatically wound up.
- The minimum subscription requirement for debt-oriented and balanced hybrid schemes during the New Fund Offer (NFO) must be a minimum of Rs. 20 crore, while for other schemes, it might be at least Rs. 10 crore.
- The mutual fund company introducing a new fund must invest in the scheme. Earlier, the company had to invest a minimum of 1% of the amount raised during the NFO or Rs.50 lakh, whichever is lower. However, SEBI has recently instructed fund houses to enhance their commitment based on the risk associated with the scheme. As a result, fund houses may have to invest more in Equity Funds compared to safer options like Liquid or Overnight Funds.
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.
For open-ended mutual fund schemes, investors have the flexibility to purchase units even after the NFO period. Open-ended schemes permit investors to enter or exit anytime, providing ongoing accessibility.
However, not all types of 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.
Why Invest in NFOs?
If an NFO introduces a new investment strategy to the mutual fund market or your portfolio and suits your risk profile, then investing in an NFO is a fair bet. Therefore, it is advisable to consult tax/financial advisors before making any investments.
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 High Returns: One of the primary benefits of investing in NFOs is the potential for good 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 NFO in share market 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 also offer investors the opportunity to diversify their portfolios. Asset management companies often launch NFOs with a specific investment objective, such as investing in a particular sector or theme. By investing in NFOs with different investment objectives, investors can diversify their portfolios and reduce their overall risk.
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: This is the biggest drawback. With a historical performance record, it’s possible to assess the fund’s ability to deliver on its promises. You’re essentially 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 compared to 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 degree of 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.
To Wrap It Up…
In conclusion, a New Fund Offer (NFO) 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/or consult their financial advisor before investing.
FAQs
NFO meaning in mutual funds is the first subscription offering for a new mutual fund scheme launched by an asset management company (AMC).
The full form of NFO in share market is a New Fund Offer. NFO period meaning is the specific timeframe during which investors can subscribe to units of a newly launched mutual fund scheme at the initial offer.
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 other funds offered by the investment company before investing in an NFO.
Investors can explore newly launched funds by keeping an eye on NFO returns, press releases from different investment companies or by visiting NFO-related news. However, it is important to do your own research and/or consult a financial advisor before investing.
Mutual Funds Investments Guides on smallcase –
All about mutual funds, it’s types, taxation, NAV, apps for mutual funds just one click away, start your mutual funds and SIP Journey today on smallcase.
