Introduction
A new fund scheme is introduced in the market through New Fund Offer (NFO). Which is run by an asset management company or fund house. This is a unique scheme in which investors having similar goals invest their savings. The objectives of each scheme may be different. So let us know further about NFO.
What is a New Fund Offer (NFO)?
The beginning of any mutual fund starts with a new fund offer. Through NFO the AMC company attracts new investors in which all the members involved are provided units of the scheme according to the amount invested. This is the initial stage when the fund is open for investment, and it generally has a fixed subscription period, after which the NFO closes, and regular trading begins.
Types of NFO
New Fund Offer (NFO) can be classified into three main types based on the structure and features of the mutual fund schemes:
- Open-ended: Open-ended funds are those mutual fund schemes in which you can invest or redeem at any time. The open-ended fund provides high liquidity as you can enter or exit the scheme anytime. Even after the NFO period is over, you can purchase units of open-ended funds at the prevailing market Net Asset Value (NAV) on any business day.
- Closed-Ended: You can invest during the NFO period only. These schemes are issued for a fixed tenure. Once the NFO period is over, further investments in the fund are not allowed¹. Redemption happens after the funds get listed on the stock exchange. As per the SEBI rule, all closed-end funds must be listed on the exchange.
- Interval Funds: Interval funds represent the characteristics of both open-ended funds and close-ended funds. These funds fall under the category of closed-ended funds, but they allow you to make purchases and redemptions through the AMC window at regular intervals. These intervals may occur annually or semi-annually, allowing investors to transact within specific timeframes.
How does an NFO work?
A New Fund Offer (NFO) is the launch of a fresh mutual fund scheme by an Asset Management Company (AMC). During the NFO period, investors can subscribe to units at an initial offer price, often nominal, such as Rs 10 per unit. After the NFO period ends, the fund is officially launched, and investors can buy or sell units at the Net Asset Value (NAV) on stock exchanges. Professional fund managers allocate capital raised during the NFO to various assets based on the fund’s objectives. NFOs provide an opportunity for investors to enter a new fund early with a low initial investment, but thorough research is crucial to assess suitability and risks.
Benefits of NFO
NFOs introduce a new mutual fund scheme, allowing investors to get in at the fund’s inception. This fresh investment opportunity can potentially lead to significant gains after the fund begins to trade publicly. However, investors should check an NFO’s expense ratio and the performance of previous funds offered by the investment company before deciding to invest in an NFO.
Sure, here are some of the advantages and disadvantages of investing in a New Fund Offer (NFO):
Advantages of NFO:
1. Fresh Investment Opportunity: NFOs introduce a new mutual fund scheme, allowing investors to get in at the fund’s inception. This can be appealing to those who want to start with a clean slate and be part of the fund’s journey from the beginning.
2. Lower Initial Costs: NFO units are usually priced at a par value (often INR 10) during the subscription period. This offers investors the opportunity to acquire a substantial number of units with a comparatively lower initial investment compared to existing mutual funds.
3. Potential for Early Gains: Investing in NFOs from the outset may present the chance for early gains if the fund performs well in its initial stages. Early adopters could benefit from the fund’s growth before it becomes widely popular.
4. Manager Expertise: Fund houses often assign experienced fund managers to newly launched NFOs. Investors may be attracted to these funds as they believe the fund manager’s expertise can be instrumental in achieving better returns.
Disadvantages of NFO:
1. Lack of Track Record: One of the significant drawbacks of NFOs is the absence of a historical track record. Unlike established funds, investors cannot analyze past performance to gauge how the fund may behave in different market conditions.
2. Uncertain Performance: While the new theme or strategy may sound promising, the actual performance of the NFO remains uncertain until it goes through different market cycles. Investors face a higher level of risk due to the lack of a proven track record.
3. Limited Information: Unlike existing funds, which provide detailed historical data and analysis, NFOs often have limited information available during the subscription period. Investors may find it challenging to assess the fund’s potential based on the limited details provided in the offer document.
4. No Immediate Liquidity: NFO units cannot be traded on the stock exchange until the fund is officially launched and listed. This lack of immediate liquidity may be a disadvantage for investors who prefer the flexibility of buying and selling units on the stock exchange.
5. Possibility of Overpricing: During the NFO subscription period, investors purchase units at face value, but once the NFO is listed, the market forces determine the unit price. There is a risk that the market price may be higher than the intrinsic value of the assets, leading to potential overpricing.
Conclusion
Investing in NFOs can be a profitable venture, but it requires a thorough understanding of the types of NFOs and how they work. Always remember to do your research and consider your financial goals before investing.
*Disclaimer: This information is for educational purposes only and should not be taken as investment advice. Always consult with a financial advisor before making any investment decisions.*
FAQ’s
What is Exit Load?
Exit Load is a fee charged by Asset Management Companies (AMCs) when an investor exits or redeems the units of a fund. The exit load is usually a percentage of the Net Asset Value (NAV) of the mutual fund.
What is a Lock-in Period?
A Lock-in Period refers to a specific duration during which an investment, usually in financial instruments like mutual funds or fixed deposits, cannot be redeemed, withdrawn, or sold. Investors are obligated to keep their money invested for the entire lock-in period, and they cannot access the funds until this period expires.