10 Mins

Introduction

With the evolution of financial products, there has been a positive outlook from investors for experimenting and exploring new products. One such financial development in the mutual fund industry is New Fund Offer (NFO). As the name suggests, the asset management company launches this fund for the first time in the market. Hence, NFO’s are being offered across various fund categories, and they aim to build wealth in the long run for investors. 

Here, in this article, we will provide you with a guide on New fund Offer with its meaning, types and how to invest with Scripbox.

What is New Fund Offer NFO in a mutual fund?

A New Fund Offer refers to the introduction of a new mutual fund scheme by the Asset Management Company (AMC). The AMC launches a New Fund Offer (NFO) to help the firm raise capital for purchasing securities. Furthermore, the NFO of mutual funds works similarly like an Initial Public Offering (IPO). Likewise, the details of the portfolio, such as the company shares to be purchased, kind of securities to be procured, fund manager, etc., are incorporated in the new fund offer document. 

An investor can subscribe to an NFO within the limited time period. They can purchase the units at the subscription price. The offer price is usually at Rs.10. Also, once the offer period is over, investors can buy the fund at a prevailing market price. The market price at which mutual funds are traded is the Net Asset Value (NAV). Both open ended and close ended funds are launched via new fund offers. 

How does NFO work?

Usually, an NFO can remain active in the market for a minimum period of 30 days. The offer price to subscribe to the NFO is at Rs.10. Moreover, the revenue that is collected is utilised for buying securities of various publicly traded stocks that are listed on the stock exchange. 

After the new fund offer period closes (close date), any mutual fund trades on the basis of the Net Asset Value NAV of the fund. Moreover, subscribing to the mutual fund during the new fund offer is a good option. The investors get the units at a nominal cost. Hence, investors can expect to generate better gains post-listing. 

Additionally, for debt funds, also known as fixed-income funds, the most popular NFOs come in the form of Fixed Maturity Plans FMP. They are fixed maturity plans FMP and work almost like fixed return plans. Also, the tenure of the assets matches with the tenure of the fund. Thus, this eliminates the interest rate risk. 

Types of NFO New Fund Offer

The following are the types of New Fund Offer.

Close Ended Funds

The close ended funds have only fixed units during the new fund offer. Only a specific number of units are offered in the close ended funds. Investors can buy these funds only during the NFO period. 

However, investors do not have an option to buy units after the NFO closes. Also, the existing investors cannot exit from the fund until the end of maturity. Thus, to ensure liquidity, the mutual fund house lists the close ended scheme on a stock exchange where the investors can buy or sell units. 

The actual price of the fund, i.e. the NAV is influenced by demand and supply. Therefore, these funds can trade at a premium or discount to the fund’s NAV. Also, The number of outstanding units of close ended funds does not change as they are traded on stock exchanges. 

Open ended Funds

As discussed above, every mutual fund is launched through a new fund offer. However, when the NFO ends, the fund is launched as an open ended fund. The most common mutual funds are open ended funds. Also, through NFO, it allows investors to purchase units of the mutual fund before the NAV is determined. There is no limit on the number of units that the fund can issue. In an open ended mutual fund, allows investors to enter and exit the fund anytime.

Furthermore, after the mutual fund starts operating post the NFO, investors have to pay the current market NAV for obtaining each fund unit. 

Therefore, investors can choose either an open ended mutual fund NFO or a close ended mutual fund NFO. Both the funds are likely to generate capital gains and dividend returns based on the type of investment scheme. Usually, open ended funds are actively managed by the fund manager. Whereas, close ended funds are passively managed funds. 

Who should opt for an NFO?

Most investors look for investment opportunities when the market is reaching new highs. Whether its gold, real estate or the stock market, investors wish to enter the market, expecting it to rise further. Investors are also willing to put their money which resembles a lucrative opportunity. Thus, they prefer investments that are available at a cheaper rate. 

In most of the cases, AMCs try to capitalise on this mentality of investors. They price the NFO at a discount to attract investors, which works most of the time. Therefore, investors also see this as a buying opportunity to go for it. Moreover, investors also see NFOs as value for money and subscribe to them. Furthermore, mutual fund houses can also achieve their goal for increasing their assets under management (AUM).

Additionally, investing in NFOs also offers flexibility to portfolio managers as well as investors. Especially for close ended funds, when markets are at a peak, the fund manager can hold a part of the investors’ funds to invest them later. 

On the other hand, since it is investors’ hard-earned money, one must do thorough research in and out before proceeding with their investment funds. 

Points to remember before investing through NFO

The following are the points to consider before investing in an NFO.

The Reputation of the AMC

Whenever the investor decides to invest in mutual fund NFO, it is of utmost importance to do the background check of the AMC. The history of the fund house influences the performance of the new NFO. It will help the investors to understand the performance delivered for other funds during the market ups and downs. Also, the background check of the portfolio manager is essential to know if the funds have been actively managed. 

Objectives of the Fund

The objectives of the fund spell out the asset allocation, riskiness, returns expected, liquidity and many more. It helps investors to develop a perception about the NFO. Also, the fund house needs to clearly explain the investment process for the given NFO through the investment horizon. In other words, the offer document shall help investors understand what the fund manager will do with their money. If the investors are unable to understand through the offer documents, then there can be a weakness in the investment process of the NFO. 

Theme of the NFO

There are many mutual fund schemes in the Indian mutual fund sector. Investors must read the offer document carefully to understand the theme of the fund. The investment theme must be sustainable and not be the same as the existing ones. However, if the NFO  is the repetition of the current strategy, then investors must reconsider before investing in that NFO. 

Returns

One must analyse the past returns of the similar funds of the fund house. The offer document does not contain this information. Therefore, if investors have already invested their money, they must consider reviewing it frequently. Moreover, investors can also compare fund performance with index performance. Also, they can compare it with peer fund performance to understand the trend. 

One can also use Scripbox’s mutual fund calculator or returns calculator to estimate their returns for any investment. 

Risk

Sometimes, investing in an NFO can also be risky. Unlike existing funds, where the investors can check the asset allocation and other factors, NFOs do not have a performance history. Also, investors cannot assess how the fund manager will utilise the funds. Therefore, without any metrics or benchmark, it is difficult for the investor to predict the fund’s performance. 

Investors should also understand whether the NFOs are equity mutual funds or debt mutual funds. They should also keep in mind that equity mutual funds are riskier than debt mutual funds.  

Cost of Investment

One of the essential parameters is also to check the overall cost involved, which can help investors to estimate the returns. Even though there is no entry load, some of the NFOs charge exit loads if redemption happens before the completion of the tenure. For instance, if the lock-in period is longer than the investment horizon based on their financial plan, then the returns can be affected due to exit loads. 

Additionally, one must also check the expense ratio of the fund. Expense ratio is the annual fee charged by the asset management company for managing money. Therefore, investors must check that the expense ratio is as per the SEBI mandates. 

Minimum Amount

The minimum subscription amount also helps to decide where the investor is willing to invest in the NFO. The subscription amount ranges from Rs.500 to Rs.5000. If the subscription amount is higher than what the investor can spare, then investors must re-evaluate their investment decision. However, in such cases, investors can opt for a Systematic Investment Plan(SIP). SIP (Systematic Investment Plan) is more affordable and a convenient option. 

Investment Period

Generally, NFOs which are close ended funds come with a lock-in period ranging from 3-5 years. Therefore, in such cases, the investor has to stay till the end of the NFO period. Furthermore, investors shall also consider investing in NFO based on their investment horizon and financial plan. Once the investor has invested in an NFO, they cannot redeem the units before maturity (in case of close ended funds). Otherwise, they may also charge a pre-exit fee (exit load) for the same. Hence, investors must evaluate their investments before investing in an NFO. 

How to invest through Scripbox?

Anyone can invest in a mutual fund through SIP or lumpsum. Suppose an investor has investment funds. In that case, making a lump sum one-time investment for a long term period is preferable. Similarly, SIP is a good option if an investor wants to invest regularly, maintaining an investment routine. One can select SIP mode as monthly, quarterly, half-yearly or yearly. Usually, SIP is suitable for first-time investors. 

One can also estimate their mutual fund investment returns using Scripbox’s SIP calculators or lump sum calculators. Both SIP calculators and lump sum calculators are available online on Scripbox’s website and free to use. 

One can invest in a Mutual fund in an online or offline way. However, making offline investment involves a lot of paperwork. In this digital world, it is better to choose an online platform for investment. The following is an easy way to invest in a mutual fund through the online platform of Scripbox. 

  • Firstly, to start an investment with Scripbox, one has to choose a plan.
  • Secondly, they should set up an investment account.
  • The next step is to make the payment.  
  • The money gets deducted from the bank after payment confirmation. The money gets transferred to the respective mutual fund company. 
  • Finally, the mutual fund company allots units to the investors. The investor gets confirmation via email or SMS. This gets updated in the Scripbox account.

Conclusion

Investing in a New Fund Offer has multiple benefits. Investors have to do proper homework before choosing an NFO to invest. Also, they need to understand the meaning of NFO of mutual funds and the benefits of investing in them. Having comprehensive knowledge and its date of activation can help investors multiply their wealth. However, it is crucial to understand the terms and conditions before investing in a New Fund Offer.