NFO or New Fund Offer refers to a mutual fund that an AMC wishes to issue to the public for the first time. Just like any existing mutual fund, the money raised from the various investors will be invested in various instruments such as stocks, bonds, government securities, money market instruments, fixed-income securities, etc., as mentioned in their scheme information document.
This article covers:
- NFO Meaning In Mutual Fund
- NFO Benefits
- NFO: Advantages And Disadvantages
- Difference Between NFO And Mutual Funds
- How To Invest In NFO?
- Is It Good To Invest In NFO?
- What Is NFO- Quick Summary
- What Is NFO- FAQ
NFO Meaning In Mutual Fund
NFO full form is New Fund Offer. It is slightly similar to the IPO launch in the primary market. IPOs are the shares that are launched by a company to raise money from the general public for their corporate purposes. Similarly, the NFO is launched by AMCs or fund houses to raise money from various investors for investing in instruments and then distribute the units to them on the basis of a fixed per-unit price.
An investor who subscribes first to the NFO will get it first at the fixed price of ₹10 per unit, which is set by SEBI (Securities and Exchange Board of India), where the subscription period is for a limited period of up to 30 days. After that, the units are allotted to the subscribers.
If anybody wishes to invest after the subscription period, it is possible only at the current NAV of the mutual funds. NAV, or net asset value, is the price that an investor has to pay to purchase a single unit. If the NAV rises after the NFO subscription period is over, the investors are in a gaining position; otherwise, they are in a losing position.
Example of NFO: Suppose an NFO is launched at a fixed price of ₹10 and accumulates a ₹1500 crores. The AMC will calculate the total units that need to be distributed based on the accumulated funds and issue price, which is ₹1500 crores/₹10 = 150 crores units, which are proportionately allotted to each subscriber.
If you have invested ₹2,00,000 in this NFO, you will be allotted ₹2,00,000/₹10, which is equal to 20,000 units. The total corpus is invested in securities, for which the prices will change on a real-time basis; hence, the price of the mutual fund will also change as indicated by NAV.
If the total portfolio value rises to ₹1,525 crores, then the NAV of the mutual fund will be ₹1,525 crores/150 crores units = ₹10.16. Your total investment or worth will rise to ₹10.16 X 20,000 units, or ₹2,03,200. Therefore, you will have a total gain of ₹3,200 with the rise in NAV, but the situation can go in the opposite direction if the NAV falls.
NFO Benefits
With NFO, you can get a chance to invest in closed-ended mutual funds with new and innovative strategies. It provides the flexibility to invest at any time during the market, even when the market is down.
There is no large amount of inflow that goes into the fund, and the money remains invested for a good long period. There is no need to analyze the market occasionally because the money locks in for a certain period.
NFO: Advantages And Disadvantages
The NFOs provide both advantages and disadvantages for investors. The prime advantage of the NFO is that it provides access to new types of mutual funds. Along with the access to new funds, the disadvantage of NFO is that there are no past records and performances on which investors can rely their decision upon.
Advantages of investing in NFOs:
- Diversification: NFOs provide diversification benefits whereby you can add a new fund into your portfolio with different themes and motives from the ones already on the market.
- Fixed issue price: These funds are launched at a fixed price of ₹10 per unit, providing a chance to invest in some good and reputed AMC funds at a minimal price.
- Cheap pricing does not mean lower performance: NFOs are launched at a fixed price, which is very low, by SEBI to promote investment, but this does not mean that they will have low performance in the future. Because the pricing or NAV of any mutual fund is dependent on its underlying securities, the fund’s performance will surely rise if the underlying securities provide good returns.
- Compounding benefits: With closed-ended mutual funds, you will get the benefits of compounding over the long term. By entering at the lower and fixed entry price, you can get a good corpus if you remain invested for the full lock-in period.
- Rise in performance: NFOs are usually launched by the AMC during the bullish phase of the market, and that can provide you with the potential to earn good profits in the future if the situation remains the same.
- Good for both short-term and long-term investments: NFOs come in both open-ended and close-ended types, thereby allowing you to earn short-term profits in the open-ended scheme and long-term profits along with compounding in the close-ended scheme.
- High returns in the future: As the close-ended mutual funds are managed by the fund manager, they can hold on to some of the corpus that comes at the time of the subscription period. This will give you higher profits at the market peak when the fund manager decides to invest in securities.
Disadvantages of investing in NFOs:
- No prior records: There are no prior performance records for these funds that you can analyze. You can only analyze the performance of the AMC, which is launching NFO.
- High expenses: There are high expenses that can be passed on to you by the AMC, as they are paying a lot for the promotions and advertisements of these NFOs. This is reflected in the expense ratio, which you must pay as a percentage of the average NAV over time.
- Similar schemes: You may think that you will get exposure to a new basket of assets with NFOs, which is sometimes not true because many AMCs launch these funds only to enlarge their offerings by copying other NFOs or mixing and matching the holdings of previous funds.
- Investors think that they are similar to IPOs: There is a common myth that NFOs are exactly similar to IPOs, but this is not true. The price, or NAV, of the mutual fund does not rise with the demand as in the case of stocks. The units can be handled by AMCs, and they can generate as many as they want.
Difference Between NFO And Mutual Funds
The main difference between NFO and mutual funds is that investors will get a chance to invest in new theme funds at a lower price, whereas mutual funds are already there in the market at a certain higher price.
| No. | Points of Difference | NFOs | Mutual Funds |
| 1. | Purpose of Investment | The purpose of investing in NFO, which is a new mutual fund, is to get the benefits of a new theme focus, cheaper access, potential profits in the future, etc. | Every mutual fund was once an NFO, where the purpose was to invest in different types of schemes according to the investors’ financial goals. |
| 2. | Historical Data | Historical data such as expense ratios, benchmark returns, etc., are not available in NFOs. You only have the option to read the scheme information document (SID). | The existing mutual funds will have all the historical data to analyze, such as expense ratio, performance against a benchmark index, past returns, and so on. |
| 3. | Per Unit Pricing | The per-unit pricing of NFOs is fixed at ₹10, which is set by SEBI. This will provide you access to some highly reputed NFOs at a minimal price. | There is no fixed per-unit price because they fluctuate daily, as indicated by their NAV. The pricing of the existing mutual funds changes on the basis of the performance of the underlying asset. |
| 4. | Profits Expectation | NFOs can provide exceptional profits if the underlying security performs well after the subscription period, resulting in short- to long-term profits. | The mutual funds’ profits or prices can fluctuate daily because the NAV fluctuates every day. |
| 5. | Availability to Invest | The NFOs are only available to invest in during the subscription period, which is a maximum of 30 days. | If it is an open-ended fund, the existing mutual funds are available to invest in at any time. |
| 6. | Expense Ratio | The expense ratio can be a bit higher compared to those only available on the market because of high initial advertising costs. | The mutual funds that are already there may have a lower expense ratio because they don’t have to spend on promotional activities. |
| 7. | Ideal for Investors | NFOs are more suitable for investors who can analyze the stock market well to understand the dynamics and have a high-risk appetite along with long-term investment goals. | Mutual funds do not require the time to analyze the market, they can be invested anytime, and they are ideal for investors with different risk capacities and different investment horizons. |
| 8. | Avoid Market Volatility | With the NFO, you can avoid market volatility because they generally come with a certain lock-in period, and the fund manager is managing them to provide you with the best profits. Therefore, you will be better off in the long run and can avoid short-term market swings. | The existing mutual funds are usually easy to redeem, and you are also constantly keeping an eye on their performance to decide whether to hold them or redeem them. Hence, you cannot avoid market volatility and cannot benefit in the long run because of so many options. |
How To Invest In NFO?
You can invest in NFOs both online and offline. However, it is important to check the KYC of your trading account before applying to any NFO, because if you don’t have a completed KYC, then your application will be automatically rejected.
- Online Method
You can apply for NFOs by opening your trading account with a stockbroker and completing the KYC process online. Here are the steps to follow to apply online with the Alice Blue website:
- Enter the title tag “Alice Blue Mutual Funds” on the search engine.
- Click the first link that comes up on the page, which is “Mutual Funds By Alice Blue”.
- After that, click on the login/signup button in the site’s upper-right corner.
- After completing the full KYC process or logging in, check the list of upcoming NFOs.
- Enter the amount you wish to buy after analyzing the scheme well and reading the scheme information document.
- Click on “Submit” and make the payment using the list of gateways available.
- Offline Method
In the offline method, you have to fill out the physical application form by visiting the AMC or registered broker’s office. You have to complete the registration process, along with the KYC process, and submit the required documents. You have to select the NFO, fill out the form, and then pay the amount using a check or through net banking.
Is It Good To Invest In NFO?
It is good to invest in NFOs only when you have some risk-taking appetite and if you have some understanding of the market as well as the ability to analyze some of the prerequisite factors before investing in them. These are the factors that you should consider before investing in NFOs to make an informed decision that matches your personal investment goals:
- AMC’s historical performance: Though you do not have the benefit of analyzing the mutual fund’s performance, you can still analyze AMC’s historical performance and its track record of providing returns in the past. If the AMC has provided good returns in the last 5 or 10 years, then the NFO can be worth considering.
- Read the scheme information document: The scheme information document is the document that is being provided by the AMC with the approval of SEBI and has details of the portfolio allocation, sector focus, expected returns, type of scheme, fund manager experience, etc. By reading this, you can get an idea of how the investment process will be handled by the fund house and their future analysis.
- Decide the investment amount: Every NFO has a certain minimum subscription amount that you need to invest. If it matches your budget, then you can choose to invest in that fund. You can also analyze the expense ratio that a fund house is charging.
- Decide the investment horizon: There are open-ended and closed-ended mutual funds that have different investment horizons. You need to analyze your investment goals to decide where to invest your hard-earned money and the return you want to achieve. If your investment horizon is short, you should invest in open-ended mutual funds, and if you have a longer investment horizon, you should invest in closed-ended mutual funds.
- Risk analysis: If the NFO is a debt fund, it carries a lesser risk, and if you are risk-averse and want stable returns, then only you should invest in them. If the NFO is an equity fund, it carries a higher risk and higher return potential, and if you can take a risk, then you should invest in it, and so on.
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What Is NFO- Quick Summary
- An NFO, or new fund offer, is a new mutual fund that is introduced by the fund house for the first time to the general public, just like an IPO in the stock market.
- The benefit of investing in NFO is access to close-ended mutual funds.
- The advantage of NFO is their fixed pricing, and the disadvantage of NFO is the lack of prior records to analyze the performance.
- The NFOs and mutual funds are different because one has no prior records and has a fixed pricing, while the other has previous performance records and has no fixed pricing.
- The NFOs can be applied in both online and offline modes through a registered stock broker or AMC by completing the KYC process.
- It is good to invest in NFO if the investor can take the risk and analyze certain factors, such as AMC’s historical performance, the scheme information document, etc.
What Is NFO- Frequently Asked Questions
The NFO full form is a “new fund offer,” which are the mutual funds that are being offered or launched for the first time in the market by the AMCs or mutual fund houses.
Mutual funds can be a better choice than the NFO because of the historical performance analysis, fair NAV, and ease of making future predictions. The NFO is better only if you have done an analysis of the AMC that is launching the fund.
The open-ended NFOs do not have a lock-in period, whereas the closed-ended NFOs have a lock-in period of at least three years, which can only be redeemed by paying an exit load or selling it at the stock exchange.
You can invest in NFO for a minimum amount that is fixed by every AMC. If you consider investing more than the minimum amount, then you can choose to go with the SIP and invest more in later installments.
After buying NFOs, you will receive the allotment of the units of the mutual fund on the basis of the total corpus accumulated and the issue price on a proportionate basis.
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