What Are NFOs And Why Should You Invest In Them

If you have been thinking of investing in mutual funds, you may have come across the term NFO or New Fund Offer. NFO is the first subscription offer when an investment company launches a new mutual fund in the market. The subscription is done at an offer price for a limited period of time, which is currently 30 days as per SEBI regulations. Once the NFO closes, the mutual fund is once again available for subscription at NAV. NFO is a great option for investors as they get a chance to add units to their kitty at a very nominal price. Once the fund starts trading in the open market, they can trade the units and make massive profits.

Last financial year witnessed a surge in NFOs, and in fact, it was 75 percent more than the last ten-year average of launches. Unfortunately, many investors wrongly assume that investing in NFOs is the same as investing in an IPO for equity. So let’s dive in and examine NFOs more closely so that you can learn why investing in them is a good option.

Types of NFO:

There are two main categories:

Close-ended funds: Such funds only offer a specified number of units when a New Fund Offer is released. This means that the investors remain the same right from the beginning of the NFO until the end of the scheme. The period is typically 3-4 years. Once the time period is over, the investors are free to sell the units on the market. Since close-ended NFOs are for a longer duration, it prevents investors from indulging in bad investment behavior. Unlike open-ended funds, close-ended NFOs allow you to invest in new strategies as well. Moreover, the fund managers closely monitor the stock selection and track the performance of the funds, minimizing the risks associated with a bad investment decision.

Open-ended funds: For such funds, investors are permitted to subscribe to the NFO before the determination of NAV. They can trade the units on the market once the NFO closes. Open-ended funds are more popular as there is no limit on the entry or exit of the investors. There is also no limitation on the amount of capital that can be raised from the investors. However, since these funds have a sudden outflow, the fund managers may end up selling the units at a lower price without making a sound investment decision.

Why should you invest in NFOs?

There are a couple of reasons why NFOs are a good option:

It is a great way to add variety to your investment portfolio, especially if the NFO introduces a mutual fund in a new sector. NFOs also start with a clean slate and don’t carry the baggage of past performance. They are also cheaper when compared to the existing funds in the market.

If the fund manager is a credible one with a good track record and the mutual fund pertains to a sector that is predicted to do well in the future, the chances are that the fund will also perform well. Therefore, even if the market is currently in bad shape but the NFO was launched when the market was at its peak, the fund manager can stay put with your fund and invest it later.

But just like you don’t order every single item from a menu, it doesn’t make sense for everyone to invest in every NFO. Most NFOs are suitable for long-time investors and allow them to purchase a larger number of units at a cheaper rate than they can sell when the prices rise. It is also important to evaluate whether the NFO matches your investment objective, risk appetite, and asset allocation strategy.

What to check before investing in NFOs?

Like any other investment, you need to have a thorough understanding of NFOs before you start investing. Here are a few things you must take into account if you are planning to invest in NFOs: 

What is the USP: Given that mutual funds have become such an incredibly popular investment avenue, they are available dime a dozen. Due to a large number of mutual funds in the market, you may find it overwhelming to choose the right one. That’s why whenever there is an NFO announcement, check if the fund offers something unique which makes a strong case for you to invest your hard-earned money. Only if the fund offers something better than what is available in the market will your investment feel financially rewarding.

What are the costs: Read the NFO document closely to identify the various costs associated as you don’t want a chunk of your investment money to go towards meeting unnecessary expenditures by the fund. Bear in mind that these costs vary for equity, debt, and index funds. Ideally, the total cost of the fund should go down as it grows. It is also a good idea to compare the prices of different fund houses, observe their track record, and then make a decision to invest.

Apart from the above, you should also take into account the reputation of the fund house, the returns from similar funds that are already available in the market, the lock-in period for closed-ended funds, and the investment objective set out in the NFO document.

Investments in NFOs can be undertaken through a broker or your online trading account. But there’s little sense to invest in an NFO simply because everyone else is doing it. Remember that, unlike existing mutual funds for which you can rely on the historical performance data, there is no past performance for NFOs you can look at. If you are a beginner or a risk-averse investor, selecting the right NFO for investment can be a daunting task. And that’s where a seasoned investment advisory platform such as Moneyfront can help you. Based on your financial goals and profile, we can recommend whether putting your hard-earned money towards NFOs is an intelligent choice. So don’t hesitate to get in touch if you want to explore more about NFOs.