A New Fund Offer [NFO] is when a mutual fund company launches a new mutual fund scheme. The company declares the new scheme to raise capital from investors to put in the pooled money in a basket of securities they wish to invest in — stocks, bonds, and other financial instruments. As an investor, you get to subscribe to the freshly minted mutual fund scheme for a relatively small sum of money.
When an NFO is first launched, the mutual fund house provides a subscription offer price of ₹10. The money collected during the timeframe is used to buy financial securities listed on the stock exchange after thorough analysis and research by the fund manager and the team. An NFO, when launched, remains active in the market for at least a month. Once the subscription offer of the NFO closes, all trades are then based on the Net Asset Value (NAV) of the fund.
The central premise of investing in an NFO is the opportunity of buying fund units at a low, nominal cost. If you believe that the fund could generate better returns post the listing, it can be a good idea to invest in the NFO. It can give you access to an emerging economy sector and may also give you the ability to diversify your portfolio.
What sorts of NFOs are available?
Regarding NFOs, there are two types of funds you may want to know about.
- Open-ended funds: Most mutual funds issue this type of NFO. Through this NFO, you can purchase mutual fund units before the NAV is determined. You can choose to buy any number of units that the fund issues. Also, you can enter and exit the fund at any time.
- Close-ended funds: These funds only provide fixed units during the NFO. That means you can buy these funds only during the NFO subscription timeframe. There is no opportunity of purchasing the units after the NFO closes, neither can you exit from the fund until it matures.
What should I look out for before investing in NFOs?
- For one, look into the reputation of the Asset Management Company [AMC]. The fund house's reputation and history can be a good indicator of how the NFO is likely to perform. Going through the fund house's other fund schemes will help you understand how the funds are performing during market cycles.
- Another vital factor to study is the portfolio manager's credentials. Conduct a background check of the fund manager to know about the funds they've actively managed.
- To get a better insight into the NFO, know more about the fund's objectives through its offer document. For one, it reveals asset allocation, expected returns, risk profile, liquidity and other essential factors. It also spells out the investment process for the NFO across the investment horizon. This document allows you to understand what the fund manager will do with the pooled money.
- dentifying the overall cost involved can also help you estimate the returns from the NFO. For instance, there may be no entry load to the NFO. But at the time of redemption, you may be charged a hefty exit load before you complete the tenure. Also, look into the fund's expense ratio, which is the annual fee charged by the AMC to manage the pooled money.
- Get to know the minimum subscription amount to invest in the NFO. Regarding close-ended funds, learn more about the investment phase that comes in with a lock-in period.
Does investing in NFOs make sense?
One way to start is to read beyond the marketing campaign of an NFO. Of course, you may see literature on how the NFO could present an opportunity for exceptional returns. But before you invest, you need to be wary that there is no proven track record of success.
Also, NFOs do not work like IPOs. That means you may not have an advantage of investing during the NFO subscription timeframe. Besides, the launch timing of the fund could be for several reasons. Perhaps the AMC is looking to complete the product basket or address the demand in the market for a specific type of fund.
To make a thoughtful decision, you would need to spend some time poring over financial news sites, press releases, analyst reports, and similar data that could give you some insight into whether the NFO is a sound investment opportunity.
It would help if you also examined the fund's expense ratio and monitored the performance of other mutual funds offered by the fund house launching the NFO before investing in it. Like every investment, there is no precise way to predict with absolute certainty if the NFO would be a successful scheme in the future.
This story is a part of BOOM Money's series on personal finance