New Fund Offer (NFO): What You Need to Know

How Does a NFO Work?

1. The Process:

Investors subscribe to the fund during the NFO period. After the NFO closes, the AMC pools the collected funds and begins investing money per the fund’s strategy.

• The AMC announces the NFO, detailing its investment objective, fund manager, and portfolio strategy in the Scheme Information Document.
• Investors can subscribe to the fund during new fund offer period, typically lasting for not more than 15 days The units are usually allotted (allocated to investors) as per the details in the Scheme Information Document (SID).
• After the NFO closes, the fund deploys the collected money into its chosen investments.
• For open-ended funds, the scheme reopens for investors after the NFO period, with units priced based on the Net Asset Value (NAV).

2. Timeline:

Investors can subscribe to the fund during a limited period, not more than 15 days Post closure, allotment takes place, this refers to the process of assigning units of the fund to investors based on their investment amount. The fund is then listed for ongoing buying and selling of units (for close-ended funds).

3. Subscribing Digitally:

If the AMC offers the ability to subscribe via an App or Website, there are a few things to note.

• You will only be able to subscribe to the NFO during the set subscription period and once scheme reopens for subscription, as per scheme type.
• For open-ended funds, during the allotment period, either the ability to buy / sell the fund will be removed from the App or attempting a buy will result in an error message.
• You may not see your investment reflected in your portfolio for several days after you subscribe. Once the allotment takes place your purchase will be reflected.

Types of NFOs

Currently, there are 3 types of mutual fund schemes that can be newly launched as an NFO.

1. Open-Ended Funds:

These funds allow investors to enter and exit any time after the NFO period. The fund continues indefinitely, and the NAV (Net Asset Value) changes daily based on market performance.

• These funds continue to accept investments even after the NFO period.
• Units can be bought and sold at the prevailing NAV. This represents the price at which investors can buy or sell units of the mutual fund
• Suitable for investors who want flexibility and liquidity.

2. Close-Ended Funds:

These have a fixed tenure and do not allow redemption until maturity, meaning your money stays invested until the fund term finishes. Units are tradable on stock exchanges, but liquidity may be limited.

• These funds only accept investments during the NFO period and units are listed on stock
• These funds have a set time frame after which investors can redeem units.
• The fund may list on a stock exchange allowing you to trade it.

3. Interval Funds:

These funds usually invest in equity or debt instruments or both. The units of these funds can be purchased and/or redeemed only during specific time intervals. The fund house tells the investors when they can buy/sell units. They are similar to closed-ended funds but with designated time periods for buying and selling units.

Why Do AMCs Launch NFOs?

• To introduce unique themes or investment strategies.
• To address evolving economic trends, thereby enabling investors to stay ahead of the curve.
• To meet changing investor needs and offer timely and relevant solutions.
• To fill product gaps, ensuring complete product offering across asset classes.
• To support long term growth by providing schemes that match investor goals, helping investors diversify and grow their portfolios.
• To broaden AMC’s reach and enabling deeper engagement for evolving investment journey.
• To capitalize on favorable market conditions and help investors benefit.

Why invest in NFO?

Investing in NFO can offer the following benefits:

• Growth Potential through Early Access: Investing in NFO allows investors to participate in a new strategy from inception. But it is important to remember that future performance is uncertain.

• Introductory Pricing: Units are available at a fixed face value or fixed price (usually Rs. 10 per unit), which may appeal to investors. However, it does not guarantee performance of the fund in the future.

• Diversification: NFOs often introduce new themes or asset classes, helping investors diversify. But evaluating the fund’s strategy is the key.

Is an NFO right for you?

NFOs can be a good option for you if:

• The fund’s investment strategy aligns with your financial goals.
• The fund house has a strong reputation.
• You are looking to invest in a new theme or asset class that is not available in existing funds.

Tips for Investors on How to Evaluate NFO Before Investing

• Research: Study the AMC’s reputation, fund manager expertise, and investment strategy amongst other factors.

• Understand the Costs: Opt for Direct Plans to avoid distributor commissions and lower expense ratios.

• Check Liquidity & Lock-In Period: NFOs for open-ended funds provide liquidity – this means units can be easily sold, while close-ended funds lock your money in for a fixed period. In case of close ended funds, Investors can buy and sell units on the stock exchange, though prices may fluctuate.

• Research the Fund’s Investment Strategy: Ensure the NFO’s investment objective aligns with your risk tolerance and financial goals.

• Professional Advice: You may want to seek guidance from financial advisors before making a decision to invest.

Bottom Line

Subscribing to NFO offers you the chance to invest in a new fund at the earliest possible time. Getting in early has some advantages but, as always, fund performance can go up or down and so they should be evaluated like any other investment.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully