Must Knows

Managing assets through NFO

[] Know all abt New fund offer- NFO in this article

What is NFO?

An NFO (New Fund Offering) is the first time subscription offer for a new scheme launched by Asset Management Companies (AMCs). A new fund offer is launched in the market to raise capital from the public to buy securities like shares, government bonds, etc., from the market.

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NFO is similar to IPO (Initial Public Offering) as it attempts to raise capital from the market. NFOs are offered for a brief period, and investors opt to invest in these schemes at the offer price (in most cases, the offer price is fixed at Rs. 10). After the NFO period, investors can take exposure to these funds at the prevailing NAV. As per SEBI regulations, a new fund offer can remain active in the market for a maximum of 30 days.

Types of New Fund Offer

  • Close-ended funds: Often offered by some of the most highly marketed new fund issuances since closed-end funds only issue a specified number of shares during their new fund offer. Close-end funds can be bought on their launch date through a brokerage firm, and they trade daily on the stock exchange. 
  • Open-ended funds: Open-ended funds do not limit the number of shares they offer. Such funds can be bought and sold from a brokerage firm on their initial launch date or after. The shares are not traded on the stock exchange and are managed by the fund company or fund company’s affiliates. 

NFO: How to choose one?

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There are many NFOs in the market. It’s advisable to read the scheme documents to grasp the fund theme of NFOs. The investments should be sustainable and have a history of favourable returns. You can set your expected rate of return against which you can analyse the fund accordingly. If you have already invested money in the fund, you can consider reviewing its quarterly or comparing the mutual fund’s performance with the index and peer funds to understand the return trend.

Who invests in NFO?

Most investors opt to invest in an NFO to enjoy a bullish market. A bullish market means that the market is at a peak and continues to grow for a brief period. It allows lucrative investments in a cheaper-rated asset. Here, the asset management offers NFO to capitalise on the market sentiments and traders’ mentality. Moreover, due to the bull run, investors find the NFOs a value for money proposition and subscribe to them.

NFO: Is it worth investing in?

An NFO helps in raising money from the public to purchase securities like shares and bonds. Moreover, NFOs are cheaper than the existing funds as it is new to the market. However, it is advisable to do your research before investing in NFO.  

NFO: Things to be careful about before investing 

  • AMC reputation: The financial history of an asset management company or investment bank heavily influences the future performance of a new NFO launched. Moreover, the background of all portfolio managers should be analysed thoroughly if the mutual fund is actively managed.
  • Cost of investments: An NFO Mutual Funds offers a minimum subscription offer, wherein a stipulated number of units have to be bought from participating in the new fund offering. A significant investment burden is imposed on people willing to invest in an NFO.
  • Nature of the securities: When an NFO is announced, it has a mandate listing, incorporating details such as the types of stock market instruments that will be bought from the raised capital. Such documentation is vital as it highlights the risk associated with the capital invested, as well as the expected return on investments.

How much money is needed to invest in an NFO?

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Every NFO specifies a minimum subscription amount for the investors ranging from Rs 500 to Rs 5000. If the minimum subscription amount is higher than what you can spare, re-evaluating your investment decision will be a good idea. You may choose Systematic Investment Plan(SIP) to enjoy high-yielding returns at a more affordable and convenient rate.  

NFO: Risks associated 

A risk-averse individual should steer clear of equity mutual funds and small and mid-cap companies. Hence, opt for NFO funds primarily to invest in a debt fund or blue-chip companies. An individual with a high aptitude for risk, on the other hand, should consider investing in aggressively managed equity funds operated by trained portfolio managers. Moreover, NFOs don’t share past performance history. Thus, you won’t be able to assess how the fund manager intends to utilise your money. 

NFO: Time period of investment

NFOs come with lock-in periods ranging from three to five years. Here, you need to stay invested for three or five years. Thus, ensure that your investment aligns with your investment horizon and goals. Moreover, you cannot redeem your NFO units before maturity. If you choose to exit before maturity, you will be charged a pre-exit fee for the same.

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Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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