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When it comes to investing, there are a variety of options available to individuals looking to grow their wealth. One such option is investing in mutual funds, which allow investors to pool their money together and invest in a diverse portfolio of assets managed by a professional fund manager.One way in which mutual funds are made available to investors is through New Fund Offers, or NFOs. NFOs are essentially a type of initial public offering (IPO) for mutual funds. They represent the first time a mutual fund scheme is made available to the public, and investors can subscribe to the fund during the NFO period.Let us take a detailed look into what is an NFO, the workings of an NFO, types of NFOs and their benefits.
What is a New Fund Offer?
NFO stands for New Fund Offer. When a mutual fund scheme offers its units for the first time for investments, it is known as a New Fund Offer (NFO). In its essence, a New Fund Offer is similar to an Initial Public Offering (IPO) of shares. Just like IPOs, NFOs are launched in the market to raise capital. Let us take a detailed look into the workings of an NFO, types of NFOs and their benefits.During a New Fund Offer, investors have the opportunity to purchase units of the scheme at their face value, which is Rs. 10 per unit. However, this offer is available only for a limited time period, say fifteen days or a month. Once this period expires, interested investors shall be able to take exposure only at the prevailing NAV. Since NFOs are restricted to a confined time frame, units are allotted to investors in the order of their application.
Types Of New Fund Offer (NFO)
There are two types of NFOs depending on the structure of the scheme.
- Open-Ended NFO Schemes An open-ended scheme launches a New Fund Offer to form its initial corpus of assets. Once the NFO period expires, the scheme opens up for subsequent purchase and redemption requests. Investors can enter and exit the fund at their discretion and will.
- Close-Ended NFO Schemes Close-ended schemes restrict entry into the scheme only during the offer period. Once the NFO period expires, investors cannot buy and redeem their units.
Why Invest in a New Fund Offer (NFO) ?
NFOs are cheaper than existing funds in the market. They offer excellent value-for-money. Subscribers to an NFO have usually made fairly substantial gains on the differential between the NAV and the Face Value.Another reason to invest in a New Fund Offer is the fact that schemes are initially launched at a lower expense ratio. This is because the real administration and distribution costs have not started getting incurred yet.Investing in an NFO may provide investors with an opportunity to focus on an asset class or index that they weren’t exposed to before. Although this doesn’t happen often, it is beneficial to look out for NFO launches to be updated with new and upcoming investment avenues.
In Conclusion
Although New Fund Offers can be perceived as a lucrative investment opportunity, one must examine crucial details like the scheme’s fund manager, investment objectives, risk profile, portfolio, etc. before making a judgement.
FAQS - FREQUENTLY ASKED QUESTIONS
Is NFO better than IPO ?
A New Fund Offer is when an Asset Management Company (AMC) floats its unit in the market for investors to invest in. The finances gathered through this are used to invest in the various market instruments like shares, debentures, bonds etc. The returns earned from these investments are then returned to the initial investors. An Initial Public Offering (IPO) is when a company floats its own shares in the market for the first time. The funds gathered from the IPO are then used to finance the activities of the company. To put it in a nutshell, an NFO and IPO are floated by different market entities for different reasons and both serve different purposes. They can’t be compared and one can definitely not be decided as better than the other.
Which type of NFO is the best to invest in ?
Different types of NFOs have been developed in order for different investors to choose according to their preferences and discretion. Either would be a good option based on what one wants out of it and which of the conditions of either one can meet. However, most investors prefer open ended NFOs over close ended NFOs for a number of reasons.
Open-ended NFOs always stay open for transactions. So, buying and selling of the units can be done at any time. Close ended NFOs limit the transaction to the period it is open for.
Since open ended NFOs don't have a set time period, investors have the choice to decide whether they want to invest in a lump-sum method or in SIP method. In fact, a number of purchases can be made in the company under this type of NFO. However, because the duration of close ended NFOs is limited, investors can only invest in this NFO in a lump sum amount in a singular purchase.
One of the biggest benefits of an open ended NFO over close ended is the liquidity that it offers. Units from an open ended offer (except some specific schemes) can be bought and sold at any point in time. The mandatory lock in period doesn't allow for the units to be sold.
Open ended offers have public accounts of their record which one can study before choosing whether or not to invest. Close ended offers have no such track record that can be studied.
A willing investor can start with investing as little as Rs. 500 in open ended offers. But, most close ended offers have a minimum limit on the investment amount; usually of Rs. 5,000.
In an open ended offer, one can buy additional units of a fund in case the price goes down and is estimated to go up. With close ended offers, investors lose out on this benefit.
What is the minimum amount to invest in NFO ?
In open ended NFOs, investment may start as low as Rs. 500 or Rs. 1000. But in close ended offers, there is usually a minimum investment limit of around Rs. 5,000. An investor must invest more than that amount in a close ended offer if they want to invest.
How to pay for NFO ?
The entire application process for NFOs happens online through various investment portals. The option to apply physically is also available, however, most investors prefer to do it online. Along with the rest of the process, the payment of the desired amount is also completed online.
What is the face value of NFO ?
The purpose of an NFO is to sell the units of the AMC at face value instead of at the market value which turns out tobe much higher than the face value. The face value of these units sold in the NFO is fixed by the regulator at Rs. 10.
Is demat account required for NFO ?
Demat accounts are used to directly invest in and hold market securities. These include shares and stocks. As mutual funds are not a direct investment instrument, opening a demat account is not mandatory to invest in mutual funds; and subsequently in an NFO. An investor may hold their mutual fund investments in a demat account if they so choose to. But it isn’t necessary to subscribe to an NFO.
Does NFO have NAV ?
The NAV of an NFO is equivalent to the face value of the units sold in the offer. As the value of the units sold in an NFO is fixed at Rs. 10, the NAV of the units will also be Rs. 10.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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