What is NFO? How to Invest in it?

What is NFO? NFO is the New Fund Offer launched by asset management companies. It is just like the IPO launched for the stocks, NFO is for mutual fund schemes. The fund house launches the NFO for the public who will then subscribe to the NFO in the pre-defined tranches.

Today, in this article we will discuss about what is NFO, types of NFO, what are its benefits and drawbacks, why should you invest in the NFO etc.

What is NFO?

As I mentioned above the NFO is the New Fund Offer launched by the Asset Management Companies to gather funds from retail investors like you and me. Every mutual fund scheme has a theme for investment. Through this NFO, the investor can purchase the units of the scheme at the subscription price. Usually, the subscription price is set to ₹ 10. This is called the NAV (Net Asset Value) of the mutual fund scheme. Every NFO has the opening and closing date during which the investor has to make a purchase. As per the SEBI guideline, the NFO can remain active for a maximum of 30 days. Post 30 days, the scheme has to be closed. Any investor who wants to buy the units of the scheme then has to purchase them at the prevailing market rate.

The fund accumulated through the NFO will be used to purchase the various stocks and securities available in the market. The value of the NAV will change every trading day based on the value of the stocks and their proposition in the mutual fund scheme.

Key Features of an NFO

  • Gives investors a unique opportunity to diversify their investment in new/different mutual fund schemes.
  • Opportunity for the investor to subscribe to the scheme at the low initial price.
  • NFO can remain open for a maximum of 30 days.
  • Few NFO gives income tax benefits if held for more than 3 years.

Types of NFO

Let’s discuss the types of NFO. There are two types of NFO available in the market.

  1. Open ended NFO
  2. Closed ended NFO

What is Open ended NFO?

Open-ended as the name suggests, the NFO is free from any locking period. The investor can buy/sell the units as and when he/she wants. There are no restrictions on the selling of the units. The investor can exit the mutual fund scheme at any point he wishes. At the time of exit the scheme, the applicable exit load will be applicable to the investor. It is always recommended that you check the exit clause of the mutual fund scheme before you make your purchase decision.

What is Closed ended NFO?

As the name suggests, the closed-ended NFO has the locking period during which the investor cannot sell the units of the mutual fund scheme. Some of the mutual fund schemes provide income tax benefits if you hold the units for let’s say 3 or more years.

This type of scheme is not recommended as the investor has No. choice but to remain invested for the stipulated time.

Difference Between IPO and NFO

IPONFO
IPO is the Initial Public OfferNFO is New Fund Offer
For launching a stock of any companyFor collecting money from the investors
The price of the stock is decided by the promotors and SEBIThe initial price is set to ₹ 10
Daily real-time price changesPrice gets changed at the end of the day
Fund gathered will be used for business expansion or reducing promotor’s stakeFund gathered will be used to purchase the market securities
In IPO, the stock can be listed at the premium or the discounted rateIn NFO, the price is fixed, usually ₹ 10
The price movement is called stock priceThe price will be determined as NAV
The investor will get a stockThe investor will get units
Investors are classified as retail, HNI, institutional, etc.There is no such classification for NFO
In IPO, there is no locking periodIn closed-ended NFO, there is a locking period

Why should you invest in NFO?

Well, there are many reasons why an investor should invest in NFO. Let’s check them one-by-one.

Diversify investment portfolio

As an investor, it is always good that you have a diversified investment portfolio. This diversification means investment in a various asset classes like stocks, bonds, mutual funds, gold, ETF, bank deposits, and so on. A new fund offer is one of the options for the new investment. It is nothing more than the newly launched mutual fund scheme. There is a theme for each mutual fund scheme available in the market. There are also some specific rules and regulations for each mutual fund scheme for the investment.

The investor can take the advantage of the scheme based on its investment strategy. There are sectorial schemes available if you want to invest in the particular sector only.

Low entry cost

In the new fund offer, the initial investment price for the unit is set to ₹ 10. This is the starting point of the scheme so we can call it a base price. The price will not go below this base price. So if you are investing in a new fund offer, you will get the units at the lowest price. The price will then gradually increase and you will earn profit out of it.

Low entry cost is the key for any investment. This will help the investor to get the maximum profit out of his investment. You must have heard the famous quote. ‘Money save is money earned.’ The same applies here. Lower purchase cost is the direct benefit for the investor.

Fund manager takes the investment decision

The fund accumulated by the new fund offer is used to purchase the market securities. Every mutual fund scheme is being managed by professional fund managers. This fund manager has the power to hold on to your money and invest them at the right time. It is not compulsory for the fund house to invest all the money they have in their hands. So here you can take the advantage of the price correction and bear market.

Secondly, the fund manager is highly qualified and tracking the market movement daily. Because it his job to track the market and be updated with the market trends. Hence his ability of taking investment decision is higher than ours. It is good that we leave the decision on the fund manager rather than taking it by ourselves.

Lock-in Period

Lock-in period in new fund offer is sometimes blessings. Imagine the scenarios where there is a sudden outflow from the mutual fund scheme. The fund manager has to forcefully sell the stake in the stock in order to have adequate liquidity for the redemption. This sudden outflow will cause the units to sell which will affect the entire scheme as the NAV of the scheme will go down.

The lock-in period here will save you from these sudden jerks. The outflow in the lock-in scheme is very less as compared to the open-ended scheme where customer’s emotional decisions can ruin the entire mutual fund scheme.

Strategy / Theme based investment objective

Every mutual fund scheme has an investment strategy or theme. The fund manager cannot deviate from this strategy at any cost. So the accumulated fund will be invested systematically in the defined securities/stocks. This will help the investor to reduce the market risk arising from the various economic activities.

The investment theme will ensure that the fund is invested at the right place and at the right time. And as I mentioned above, the fund manager knows the right time and right place better than us.

How to invest in NFO?

Investment in a new fund offer is as easy as subscribing the Facebook or Twitter. Nowadays, there are many online platforms that help you to subscribe to the new fund offer. I personally use the Zerodha Coin platform for all my mutual fund investments. Applying for the new fund offer is super easy with Zerodha’s coin platform. You just have to select the new fund offer from the list, punch in the investment amount, and there you go!

The platform will take care of the rest of the thing and the units equivalent to your investment amount will be credited to your account. You can track your investment through the coin web portal as well as the mobile app.

Points to consider before investing in NFO

Check out below points which will help you to make informed decision while applying for the new fund offer.

  • Check the reliability of the fund house that is launching the new fund offer. Go with the fund house that has a good history of investment and returns.
  • Check the asset allocation of the scheme before you invest in it. This will help you to understand where your money will go once you subscribe to the scheme.
  • Check the expense ratio of the scheme. The expense ratio is the sum of all the expenses related to the scheme including marketing cost, fund manager’s salary, AMC’s commission, etc. The higher the commission lesser is your profit.
  • New fund offers do not have any past performance history. So you will not be able to judge the scheme’s performance as there is no comparison of past performance is available.
  • Check the lock-in period of the fund if any. This will help you to make an informed decision as once invested you will not be able to withdraw money until the lock-in period is over.

Conclusion:

I personally have never subscribe to any of the NFO till now. There are some good and bad of investing in new fund offers. Well, it is completely depended on the individual investor to subscriber for the new fund offer or not. Above details will help you to make an informed decision on whether you should invest in NFO or not. So after reading the above article, things like what is NFO? what are the types, benefits etc are clear to you.

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