Got questions about New Fund Offer (NFO)? Here are the answers

If you are an investor, read on to learn more about New Fund Offer.

Got questions about New Fund Offer (NFO)? Here are the answers

A New Fund Offer (NFO) is a subscription offer made for a new scheme for the first time by an Asset Management Company (AMC). In simple terms, an NFO is launched in the market with the objective of raising capital from the public to buy securities from the market. It is open for a stipulated period of time. This effectively means that if you wish to invest at the offer price, you can do so only during this period. After the NFO period is over, you can still invest further in that mutual fund – but at the prevailing Net Asset Value (NAV). 

How does New Fund Offer work?

A New Fund Offer is similar to an Initial Public Offering (IPO) in the sense that both are launched with an objective to raise capital to increase business opportunities. NFOs are marketed aggressively via marketing campaigns to motivate investors to purchase more units in the fund. An NFO targets a specific group of investors. As a result, it may be less noticeable to individual investors than an IPO. NFOs have the potential to result in significant gains after they begin to trade publicly. 

Related: How IPOs differ from NFOs?

Are New Fund Offer a good investment opportunity?

New Fund Offer offers the following benefits:

  • Fund strategy – The opportunity to create a fund strategy is the main USP of an New Fund Offer. One of these fund strategies can be an exposure to a new asset class or commodity that one may not find in existing open-ended funds. Such a strategy can boost the fund's return on investment. 
  • Diversification of portfolio – Unexpected market movements can cause one’s portfolio to tilt in a particular asset class. This requires immediate attention and tracking. Try to rebalance the portfolio to adjust allocations based on one’s risk profile and financial goals. At such times, one can strongly consider New Fund Offer to diversify one’s portfolio – while ensuring that the overall portfolio risk meets the individual’s appetite for risk. 
  • Attractive offer price – New Fund Offers are offered at a price of Rs 10 per unit. This is a rare opportunity to execute a specific strategy at an affordable price. If you invest in the fund after the NFO period, you may end up investing in the same scheme at a relatively higher NAV. 
  • Liquidity – Every portfolio demands liquidity, and investing in New Fund Offer of open-ended funds is a simple way to achieve that. 

Related: 6 Practical strategies to help reduce investment risk

What to consider before opting for an New Fund Offer?

Before everything else, ensure that the fund house is reliable and has credibility in the mutual fund industry. Here are some other factors to keep in mind:

  • Minimum subscription amount – NFOs usually come with a minimum subscription amount for investors, which can start as low as Rs 500. However, if the minimum subscription amount is higher than what you wish to invest, you can re-evaluate your options. 
  • Time horizon – Some NFOs come with lock-in periods that may range from three to five years. In such cases, it’s mandatory to stay invested for the entire tenure. Ensure that your investments are completely in line with your investment horizon and stated goals. Once a subscription to a mutual fund scheme is done, you may not be able to redeem your units before maturity in closed-ended schemes. Always re-evaluate your goals based on the time horizon of the NFO. 
  • Risk factor – Investing in NFO can entail a degree of risk. Unlike with existing funds, where one can easily check the asset allocation and risks involved, NFO does not have a performance history. Hence, you won’t be able to assess how exactly the fund manager intends to allocate money. With no benchmarks and no history, it can be difficult to predict the fund's performance.

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  • Returns – It is natural to have expected returns from portfolios. When investing in an NFO is under consideration, you should analyse past returns. Review it quarterly for the first three years. You can compare the fund's performance with the index assigned and peer funds. 
  • Fund house reputation – A background check of the fund house is imperative. Ensure that it has a strong history of operating in the mutual fund industry for at least 5–10 years. A fund house of repute is likely to deliver well during market fluctuations and you can expect the NFO to perform as promised. 
  • Fund objectives – NFOs highlight asset allocation, investment horizon, portfolio risk, liquidity, etc. All this helps to give a good picture of their sustainability. NFOs also need to clearly state the investment process. After reading the offer document, potential investors should be able to understand what the fund manager is going to do with their money. Here are some important things to know before investing in the stock market.

What is the role of a fund manager and why it is important?

Fund manager is responsible for executing the stated fund strategy and selecting securities as per the fund objective. Especially during an NFO, the fund manager can choose to hold a part of your investments in cash and invest them at a later date, in case the timing is not apt for the entire investment.

NFO lets fund managers enjoy the liberty to buy without worrying about untimely redemption by investors. Hence the choice of securities and their entry time is highly crucial and that remains in the hands of the fund manager.

What is the process of investing in New Fund Offer?

One needs to have Permanent Account Number (PAN) and Know Your Customer (KYC) duly submitted in order to be any Mutual Fund investor. Investing in an NFO further entails filling up and signing the application form for the NFO, which is available along with a document called the Key Information Memorandum (KIM).

The investments in the NFO have to be made withing the 15 days of opening. Payment is made through a cheque or NEFT and RTGS. Units are allotted to investors within 5 business days of the NFO ending and the account statement furnishing all the details is sent to investors thereafter.


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