What is NFO (New Fund Offer) – Why to invest in NFO?

What is New Fund Offer in Mutual Funds?
Whenever an AMC or a fund house launches a brand new mutual fund, they offer this mutual fund at a discount / introductory price to investors before listing the fund publicly. The capital raised from this fund is used to purchase marketable securities and corporate shares. This process of raising capital for a newly launched fund to be listed publicly is called New Fund Offering (NFO).

NFO is available for a limited period only. Because of this, investors can buy NFO units only till the introductory offer is available, which usually lasts for two to three days. NFOs are available on a first-come, first-served basis and are issued in a limited number of units. Usually, a unit price of NFO is Rs. 10. If you, as an investor, have invested Rs.5000 in NFO, you will be allotted 500 units subject to availability.

After the NFO period, open-ended funds are available through the AMC to investors for purchase and redemption. A newly launched mutual fund continues to buy and sell securities depending on the investment strategy and the financial objective it wants to achieve. NAV or Net Asset Value of the Fund, which is Rs. 10, may be increased or decreased depending on the performance of the scheme. An AMC usually launches a new mutual fund if there is demand for that fund in the market or to extend its range of products and complete the basket.

How does an NFO differ from an IPO?
In the stock markets, a company that wants to raise money issues an IPO or initial public offering, where it offers shares to investors to convert from a private company to a publicly listed company. NFO, on the other hand, raises funds to buy bonds and stocks. Although the objective of both IPO and NFO is to raise money, there are still some things that differentiate the two.

But first, let’s talk about the similarities between these two. Both IPO and NFO are available for subscription for a limited period. SEBI regulates the entire process of subscription for both NFO and IPO. SEBI monitors all aspects of this subscription process, including applying for funds for allocation of assets.

While the points mentioned above allow IPO and NFO to go hand in hand, here are some things that separate the two:

• P/E and P/BV ratio are some of the essential aspects considered while pricing an IPO. On the other hand, when it comes to NFO, there is no valuation like dividing the pooled funds into units and investing them in marketable securities.
• When it comes to IPO, it is essential that they invest the funds so that the IPO adds some value to the investor. When it comes to NFO, market performance is vital as the fund can enter the market at higher valuations only if the market is performing.
• The price at which the IPO is issued is important because it also determines the perceived value of the company. Pricing is not a concern when it comes to NFO as it usually costs Rs. 10 per unit and subject to change upon market entry.
• In stock markets, you have IPOs or initial public offerings, where companies offer their shares to investors for the first time. Similarly, mutual funds have NFOs or New Fund Offerings. But the two are different in fundamental ways.
• IPOs are categorized into retail, institutional and HNI, each with a separate price tag. There is no such classification in NFOs.

Why should you invest in NFO?
While some advisors may balk at the idea of ​​investing in NFOs because they lack a track record, here are some things that make NFO investments worthwhile:

• Revealing new strategies: When you invest in an NFO, you are not just investing in a newly launched fund. What you are investing in is a new investment strategy that may or may not be implemented by other open-ended funds yet. Some strategies can only be implemented by funds that are closed during the NFO period, if investors want their funds to benefit from them, they may consider investing in NFOs.
• NFOs also offer flexibility: NFOs or closed-ended funds have the freedom to hold your funds instead of investing them in the market. For example, if you invest in an NFO when the market is at its peak, it may be a bad time for someone to invest their money. In such situations, the fund manager can keep your money and invest it after some time. It is this flexibility that allows closed-ended funds to perform well at times.
• NFOs are launched at discounted rates: Another good thing about NFO is that it is usually available at an introductory price for subscription. Investors can take advantage of this opportunity and invest in NFO units when they are available at discounted prices. Once the fund becomes an open-ended fund and gets publicly listed, the net asset value of the fund is likely to increase depending on the performance of the scheme.
• NFOs can offer some diversification: Investing in an NFO can give investors the opportunity to diversify their investments into entirely new assets. This way, you not only provide diversification to your mutual fund portfolio, but investments in NFOs can also reduce the overall risk of the portfolio. Investing in an NFO can create a new way of generating income, which may not happen with your current investments.

Things to consider before investing in NFO
While the idea of ​​investing in an NFO may feel intriguing considering some of the benefits it brings, here are some things to keep in mind before investing in an NFO:

• Invest in funds offered by a reputed asset management company: Investors looking for capital gains through NFO investment should first do a thorough background check of the AMC launching this new fund. It is better to choose a fund from an AMC that has been in business for at least five to ten years. This can help the investor get a fair idea of ​​what to expect from the fund during volatile market conditions. Invest in NFO offered by a well-known company with a proven track record.
• The purpose of the NFO should be in sync with your investment objective: Many mutual fund products have been launched throughout the year, but that doesn’t mean you invest in every NFO available. Remember that it is important for investors to first understand the primary objective of their investment before narrowing down any decision. Each mutual fund operates with a unique strategy and investment objective. So, make sure you invest in an NFO that has clear details like asset allocations, potential returns, risk profile, liquidity etc.
• Potential earnings on offer: Now, it can be a bit of a dice roll as there is no past track record of any mutual fund being launched under the new fund offering. However, if you have already invested, you can look forward to the expected returns that this scheme can provide in the years to come. It is a good idea to check the fund periodically to analyze whether it has the potential to add to your potential gains.
• The danger involved: Remember that NFO investments are risky. With existing open-ended funds, it becomes easier to keep a tab on its asset allocation and how it diversifies risk. When it comes to NFO, you cannot track these funds as they have no history or performance. NFO investments are considered risky as it is not possible to value/valuate the money invested by you. So investors should first understand their risk tolerance and invest only if they are willing to bear losses.
• Minimum Investment Amount: NFO may be available at an introductory / discount rate, but the subscription comes with a minimum amount. This amount may vary depending on the type of fund offered and the fund offered by the AMC. If the minimum investment amount is beyond your capabilities, it is better to reconsider your decision to subscribe to NFO. What you can do in such situations is to wait for the fund to be publicly listed and then opt for SIP. A Systematic Investment Plan or SIP is a systematic approach to investing in mutual funds. All you have to do is instruct your bank and every month a fixed amount will be debited from your bank account and transferred to your mutual fund. As we said earlier, invest only if the fund ticks all the right boxes for you.
• Investment Limit / Lock-in: While this does not apply to all NFOs, some come with a statutory lock-in of three to five years. Are you ready to commit to your investments for that long? It is now a fact that many equity mutual funds give better results to investors who stay with them for a long period of time. This does not apply to all funds. Therefore, it is better to invest in funds that are compatible with your investment horizon and investment objective.

Who should invest in NFOs?
An investor should always keep certain things in mind before narrowing down any investment decision. The most important thing to understand is what your ultimate financial goal is. Investing to build a retirement corpus? If so, this is a long-term goal that may require an investment horizon of 25 to 30 years. Having a realistic goal is beneficial in financial planning because it gives investors a clear picture of how much they need to keep saving if they want to reach their goal.

Next comes the investment horizon and risk appetite. If you want to build a corpus, you need to be sure about your investments. You have to be patient to see your small investments turn into a corpus. Risk appetite is nothing but a person’s ability to face losses in volatile market conditions. Although it doesn’t happen often, the future is unpredictable, and if the market crashes, you could lose your initial investment.

If you are willing to take risk with the hope of earning returns, you can invest in NFO. But remember, as we said earlier, NFOs are very risky and you should only consider investing in them if you are prepared to face losses. This does not mean that you will have to face losses. Investments, if made wisely and given enough time to grow, have the potential to deliver what investors are looking for. But remember that you are not going to become rich overnight. Investing is a long journey and there will be times when you will need to switch between funds. For this, it is advisable to check the background of the fund before investing in it. Also, make sure the funds are in the hands of reputable management. Do periodic checks to check if the fund is consistently generating income. If it doesn’t, it’s time to look for an investment that has the potential to help you reach your ultimate financial goal.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.