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New Fund Offer (NFO): Meaning, Types, Advantages and Disadvantages of NFOs, Do’s and Don’ts for NFOs, and Other Important Aspects

Have you ever heard of the quote: Do not put all eggs in one basket? Everyone of us might have come across this one day or the other as it is quoted by one of the famous and richest investors Mr. Warren Buffett. How is that related to the investment strategy? By quoting this, Mr. Buffett is simply emphasizing the importance of diversification of portfolio. An investor must explore various options of investing his wealth rather than staking the entire wealth at one place. What are the options available to an investor to diversify his portfolio? There are various options of diversification if an investor has made the investment in stock market such as: investment in fixed income securities, real estate, cash, mutual funds, exchange-traded funds (ETFs), bonds, virtual digital assets, and so on.

 

Moreover, an investor can also make an investment in shares at the time of launch of new securities via Initial Public Offer (IPO). Likewise, for a newly launched mutual fund scheme, an investor can subscribe to the mutual funds units through the New Fund Offer (NFO). IPO and NFO are often considered as one and the same. However, there is a difference between the two. In this article, the readers will learn about the New Fund Offer (NFO) and other aspects related to the same.

What is a New Fund Offer (NFO)?

When an offer is made to the public for the subscription of a new mutual fund scheme, it is termed as a New Fund Offer (NFO). Generally, Asset Management Companies (AMCs) issue NFO when a new type of fund is launched in the market to raise capital. The nature of a NFO is usually dependent on the portfolio of the fund manager and investment objectives.

 

Similar to Initial Public Offer (IPO) in case of issuance of shares to the general public, NFO is issued by mentioning all the details of the fund like the name of the mutual fund scheme, objective of the scheme, scheme type and category, launch date, closure date, minimum subscription amount, and amount of load, if any.

Recent NFOs

The recent NFOs made by all the Fund Houses across the country are made available on the official website of the Association of Mutual Funds in India (AMFI), besides also being available on the respective fund’s websites. Recent NFOs listed on the AMFI website include: Axis Fixed Term Plan - Series 120, Bandhan Multi Asset Allocation Fund, Baroda BNP Paribas Nifty 50 Index Fund, and so on. The details of the recent NFOs made by Fund Houses can be accessed at https://www.amfiindia.com/new-fund-offer.

Difference between NFO and IPO

New Fund Offer (NFO)
Initial Public Offer (IPO)
New Fund Offer (NFO) is a new scheme of a mutual fund that is launched in the market and available for subscription to the general public.
The transition from private to public company begins with an Initial Public Offer (IPO). A privately held company makes its shares available to subscription by the general public through IPO.
The Asset Management Company (AMC) issues NFO.
The private company launches an IPO and becomes a public company.
NFO is a good option for investors with low to medium risk appetite.
The stock market exposure comes with the built-in risk.
The valuations of funds are not relevant much for NFO since the funds are distributed among units and placed on the markets.
A company’s stocks are valued using either the Price-to-Earnings Ratio (PE Ratio) or the Price-to-Book Ratio.
A Fund Manager usually manages the mutual fund on the behalf of the investor.
For an IPO, a sophisticated understanding about the stock market is required by the investor himself. As there is no dedicated Fund Manager for IPO.
NFOs are usually priced at INR 10 per unit, regardless of whether they are being launched by a leading AMC or a new one in India.
IPOs are priced as the valuations of the company. There is no standard framework under this.

Types of NFO

Following are the types of NFOs:

Open-Ended NFO:

This type of NFO offers flexibility and liquidity to the investors. Under Open-Ended NFO, investors can buy or sell mutual funds units at any time at the prevailing fund’s Net Asset Value (NAV) subject to any exit load.

Close-Ended NFO:

A mutual fund scheme with a Close-Ended feature is available for subscription during the time of launch of the scheme after which no transactions are permitted until the redemption of the mutual fund scheme. During the lock-in period of Close-Ended NFO, there will be no fresh inflows or outflows.

Do’s and Don’ts for Investing in NFOs

Do’s
Don’ts
Do research about the Mutual Fund House that is launching a NFO.
Don’t invest in NFO based on others opinion.
Do understand all the aspects of NFO such as minimum subscription amount, objective and theme of NFO, fund type, and so on.
Don’t invest in NFO unless there is a unique scheme of concept from the Fund House.
Do consider all expenses when evaluating investment decisions in an NFO, including any exit loads.
Don’t invest a large sum of money in a NFO.

Advantages of Investing in NFO

Investing in NFOs provides the following advantages to the investors:

Investment at low or minimum cost: NFOs are generally launched at a low cost, making it possible for investors to make investments in comparison to the amount required to invest in existing mutual funds.

Fresh scheme variant: The NFO usually offers a new variant of mutual fund scheme, allowing investors to diversify their portfolio and thus achieve higher returns.

Expert management: Mutual funds are usually managed by the Fund Experts. As a result, investors need not be concerned about the strategies to be adopted in response to the market fluctuations, because the Fund Managers will strategize accordingly.

Diversification: Investors can diversify their portfolios by investing in mutual funds through NFOs, giving them more opportunities to earn higher returns and reduce the investment-related risk.

Flexibility: Under NFOs, the investors are provided with investment options to invest in small portions and thereby increase the size of investment based on the market conditions. Thus, a greater flexibility is offered to the investors for investment in mutual funds through NFOs.

Disadvantages of Investing in NFO

Like every coin has two sides. Likewise, investment in NFOs have certain disadvantages as well which are as follows:

Absence of previous track record: The potential investors cannot vouch for the performance of the NFOs as in the case of established funds. Since the historical records in case of NFOs are not available.

Uncertainty in performance: Because of the absence of a proven or previous track record, there will remain uncertainty in the performance of the NFO. It is impossible to assess the NFO’s performance until it has gone through the different market conditions.Access to information is limited:

Limited information related NFO: As compared to the existing funds, a whole gamut of information is available including historical information and detailed analysis, NFOs only provide limited information to the potential users. It poses a challenge to the potential investors while evaluating their investment decision based on the limited information available on the offer document.

Factors to consider before investing in NFO

An investor should take into consideration, the following factors before considering an investment in NFO:

Reputation of the Fund House: The Asset Management Company (AMC) which was consistent in launching good mutual fund schemes and that has performed well in the market will hold a good reputation in the eyes of investors and vice versa. The reputation of the Fund House will enable investors to assess whether the NFO of that Fund House will be a good investment option or not.

Investment Scope: Different NFOs have different lock-in periods and a different investment scope. As a result, investors must ensure that investment scope is in line with their financial objectives.

Investment Amount: The subscription amount for a new fund differs from that when the fund is open for regular subscriptions. When considering an NFO investment, the investor must also consider this aspect.

Objective of NFO: Before making an investment decision, the investor should compare their own perception of the risk and return to the objectives of the fund.

NFO Theme: There are various themes of NFOs like capital appreciation, value investing, growth-oriented funds.

Miscellaneous Factors: The investor should consider reading all the terms and conditions from the offer document thoroughly rather than relying on the available information. This will allow the investor to make an informed decision while also helping him understand the investment reasoning, norm, and approximate portfolio.

What after NFO?

Upon successful completion of the subscription process of NFO, the mutual fund company makes an allotment of mutual funds units to the investors of the new scheme launched. The mutual fund companies are required to make an allotment within 5 days after the closure of the subscription period. If an investor does not receive any allotment for any reason, including errors in the application form or an error in following the Know-Your-Client (KYC) guidelines, the Funds Houses have to refund the application fees.

 

If an investor is not able to purchase the mutual funds units during the NFO, he can do so later on provided it is not a Close-Ended fund. Since, only Open-Ended funds allow investors to subscribe to the mutual fund at any time.

Frequently asked questions

Q

Explain New Fund Offer (NFO) in the context of mutual funds.

A

New Fund Offer (NFO) represents a freshly launched mutual fund scheme for the first time in the market and is available for subscription by the investors. The company raises capital via NFO by issuing mutual fund units at INR 10 per unit.

Q

New Fund Offer (NFO) v/s Initial Public Offer (IPO)?

A

New Fund Offer (NFO) represents the launch of a new mutual fund scheme by the Asset Management Company (AMC) in the market. The Initial Public Offering (IPO) is the process by which a private company issues shares for subscription to the general public. Both are the mediums through which a capital is raised. However, there is a difference between the two.

Q

Explain the mechanism of NFO.

A

When a NFO is launched, the mutual fund scheme is made available for accumulating the amount of capital. Using the capital, the Fund Manager creates a portfolio based on the scheme’s objectives. The Fund Houses have to comply with the regulations of Securities and Exchange of India (SEBI). A NFO period generally exists for around 15-30 days in India. After the end of the NFO period, the mutual fund company has to make the allotment of units of the new scheme within 5 days.

Q

What are the types of NFO?

A

The common types of NFOs are Open-Ended and Close-Ended mutual funds.

  • Open-Ended NFOs come without any restriction for investment and withdrawal from the same.

  • Close-Ended NFOs have lock-in restrictions and are less flexible than Open-Ended funds.

Q

Explain the role of Applications Supported by Blocked Amount (ASBA) facilities in the context of NFO.

A

Usually banks provide ASBA facilities to the investors of NFOs. When investors apply for NFO through ASBA, their application money is blocked in their own bank account. This amount is not available for use until the units are allotted. In case the subscription of NFO is unsuccessful, the fund blocked in the bank account of the investor gets unblocked.

Q

What are the benefits of investing in NFO?

A

The NFO subscription offers following benefits to the investors:

  • The initial subscription of NFO is as low as INR 10 per unit.

  • The Fund Managers are assigned to manage NFOs.

  • NFOs provide investors with opportunities to diversify their portfolio by offering various schemes.

Q

What is the minimum investment requirement for NFO subscription?

A

Each scheme of NFO comes with different prerequisites. The minimum amount of investment required for NFO subscription depends on the type of mutual fund scheme and other regulatory requirements. Ultimately, the Fund Houses should comply with the guidelines of the Securities and Exchange Board of India (SEBI) which may specify the minimum amount required for NFO subscription.

Q

What precautions should be taken before investing in NFO?

A

The risk taking appetite and investment goals of each investor is different. While investing in NFOs, the investor may consider the following factors:

  • The investment objectives like risk tolerance, profit motive, and so on.

  • The expertise of the Fund Manager.

  • The reputation of the Fund House.

  • Disclosure and the transparency of the NFO.

Q

Are NFOs safe for considering the investment opportunities compared to the existing mutual fund schemes?

A

Yes. NFOs are usually safe for considering a new investment opportunity. However, the risk associated with NFOs depends on various factors such as the objective of the investment, asset allocation, and the associated securities of the scheme. It is wiser to carefully analyze each scheme and associated risk factors before making an investment decision in NFO.

Q

What is the maximum period for which NFO subscription can be made available to the investors?

A

According to the Securities and Exchange Board of India (SEBI) Regulations, an NFO can be active in the market for a maximum period of 30 days.

Prachi Jain

Chartered Accountant

Prachi Jain is a Chartered Accountant with a passion for simplifying finance and tax-related matters through her insightful and informative blogs. With a background in finance and a deep understanding of tax regulations, Prachi has established herself as a trusted source of financial wisdom. Prachi is committed to empowering her readers with the knowledge they need to make informed financial decisions. Her expertise and dedication shine through in every blog post, helping her audience navigate the intricacies of finance and taxes with confidence. Follow Prachi Jain's blog for practical insights and guidance on managing your finances effectively.