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-
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 Even after the introductory NFO is withdrawn, the investors are generally free to enter or exit the scheme as per their will and at the applicable NAV and subject to applicable exit load, if any.
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?
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.
NFOs come with varied minimum investment amounts, which you may want to check before you decide to invest in them.
It’s advisable to check your own investment horizon, before making a commitment to the NFO scheme depending upon the offering.
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.