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What is NFO in Mutual Fund & How does it Work?​

A New Fund Offer (NFO) is like an introduction stage for a brand-new mutual fund scheme being launched by an asset management company (AMC). The AMC gives you an opportunity to buy units of this scheme as the first subscribers of the scheme, in order to build the scheme’s AUM just before it purchases securities in the market as per its investment objective. The units are generally sold at a NAV of Rs 10 during the NFO period.

This is how it works:

How do NFOs work?

The window provided to the investors to subscribe to an NFO is limited; hence, the investors can purchase the units in this pre-defined period only. Once the offer period is over, the units of open-ended schemes can be bought like in the case of other mutual fund schemes at Net Asset Value (NAV) i.e. cost per unit of the scheme, prevalent at that point in time. Units of close-ended schemes are available for purchase on the exchange, however, there may be liquidity issues.

Types of schemes that can be offered as NFOs are-

Open-Ended-

These schemes are available for investment and redemption for the investors at any given point in time. Even after the introductory NFO is withdrawn, the investors are generally free to enter or exit the scheme as per their will and at the applicable NAV and subject to applicable exit load, if any.

Closed-Ended-

These schemes are introduced to collect a pool of money for investments in securities, post which, the schemes are closed for further transactions i.e. the entry and exit from the scheme are restricted till the maturity period is over. However, these closed-ended schemes are listed on the stock exchanges by the fund houses, and if you want to exit the scheme, you can trade these units on the exchange.

Things to keep in mind when investing in an NFO-

1.While NFO is an attractive opportunity to discover a new asset class or new investing strategies, and on the other, you do not have a proven long-term past record of the scheme to study (Past performance may or may not be sustained in the future)

2.Since the NFO’s amount collection happens before the scheme actually goes live in the market, the fund manager may have some flexibility to hold on to the funds within the regulatory limits if the market is not favourable. Whereas, since the specific securities the fund will be investing in, may not be very clear, you may have to wait to be given details about the scheme’s investment portfolio.

What to consider before buying units in an NFO?

Theme/Investment Strategy:

You may check if the scheme’s theme is in line with your own investment strategy.

NFO exit options:

In case of open-ended scheme one can exit the scheme whenever required. Few schemes having lock-in period may be an exception like Equity Linked Savings Schemes, you can exit from these schemes any time after the lock-in period is over. In case the exit happens before the exit load period, it may attract the respective exit load.

In case of a close-ended scheme, one cannot exit the scheme till the maturity period is over. However, these closed-ended schemes are listed on the stock exchanges by the fund houses, and if you want to exit the scheme, you can trade these units on the exchange.

Minimum investment:

NFOs come with varied minimum investment amounts, which you may want to check before you decide to invest in them.

Investment Horizon:

It’s advisable to check your own investment horizon, before making a commitment to the NFO scheme depending upon the offering.

Risk Appetite:

It is advisable to check the asset classes the NFO is looking to invest in, since, those should be in line with your own risk-taking appetite. For example, if you are a relatively conservative investor with a lower risk appetite, then an NFO that invests in small and mid-cap equity securities may not be very suitable for you.

Why to invest in NFOs?

If an NFO introduces an investment theme/strategy that is new to the Indian mutual fund market or new to your investment portfolio and suits your risk profile, then investing in an NFO can be a fair bet.

Investors are advised to consult their tax/financial advisors before making any investments.


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Disclaimer:
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document. Language Disclaimer:
While utmost care has been taken in translating the article into respective regional language(s), in case of any confusion or difference of opinion, article available in English language should be deemed as final. The article provided herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional advice for the readers. The document has been prepared on the basis of publicly available data/ information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of loss of profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this article. "ABOVE ILLUSTRATIONS ARE ONLY FOR UNDERSTANDING, IT IS NOT DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF ANY SCHEME OF NIMF. THE VIEWS EXPRESSED HEREIN CONSTITUTE ONLY THE OPINIONS AND DO NOT CONSTITUTE ANY GUIDELINES OR RECOMMENDATION ON ANY COURSE OF ACTION TO BE FOLLOWED BY THE READER. THIS INFORMATION IS MEANT FOR GENERAL READING PURPOSES ONLY AND IS NOT MEANT TO SERVE AS A PROFESSIONAL GUIDE FOR THE READERS."

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