Similar to how companies raise funds through IPOs, mutual fund companies come up with NFOs to launch their new fund schemes. An NFO can present a unique opportunity to help you diversify your portfolio at an initial stage of the fund. However, understanding what an NFO is, how it works, and other related aspects, is crucial to making smart decisions with your money.
What is an NFO?
An NFO or New Fund Offer is the first-time offer of a new mutual fund scheme to investors. It is the stage where the fund house collects money from investors to pool into various securities, such as stocks, bonds, or other assets, depending on the scheme’s objective. It is generally offered at a fixed price (generally ₹10 per unit) during a limited subscription period.
To better understand what an NFO is in mutual funds, think of it as an IPO (Initial Public Offering), but for mutual fund schemes. Just like private companies raise capital from the public for their growth and expansion through IPOs, mutual fund houses introduce NFOs to launch new schemes and expand their offerings.
Now that you know what NFO funds are, let’s look at how they work.
How Does an NFO Work?
In simple terms, an NFO is the launch phase of a mutual fund scheme. At this initial stage, the mutual fund house is inviting investors to participate before the scheme becomes fully operational.
Announcement
The Asset Management Company (AMC) announces that it is about to launch a new scheme. They also include details, such as the fund’s goals, investment mix, level of risk, and the kind of investors it is designed for.
Opening and Launch
The NFO opens for a specific period, usually between two to four weeks. During this time, investors can purchase units at a fixed price, most often ₹10 per unit. This price is applicable only during the NFO window. Once the subscription closes, fresh investments at the base price are no longer allowed.
Fund Construction
The money collected during the offer is then pooled together and handed over to the fund manager. The manager uses this money as per the scheme’s stated plan. It gets invested in equity, debt, or hybrid options.
Active Fund
From here, the fund becomes active, and its Net Asset Value (NAV) starts changing daily with market performance. In open-ended NFOs, investors can buy or sell units anytime at the prevailing NAV. For close-ended NFOs, new investments stop after the offer period, though units may be traded on the stock exchange.
In short, a New Fund Offer gives investors an early chance to enter a new fund at its base price. Once active, however, the fund’s performance is driven by several factors.
Example:
Suppose you invest ₹20,000 in an NFO at ₹10 per unit. You are allotted 2,000 units. Once the NFO closes, the fund manager invests the pooled money into shares and bonds as per the scheme’s objectives. After a few months, if the NAV rises to ₹12, the value of your investment becomes ₹24,000. If the NAV dips to ₹9, your investment value reduces to ₹18,000.
Thus, the base entry price may offer you an initial advantage. But the eventual returns depend on the performance of the market and the fund manager’s strategy.
Types of NFOs
When learning what NFO funds are, it is important to know they usually fall into three main categories: Open-Ended, Close-Ended, and Hybrid NFOs.
Open-Ended NFOs
These remain accessible even after the initial NFO period ends. Once the scheme goes live, investors can continue to buy or sell units at the prevailing Net Asset Value (NAV).
For instance, if you bought units at ₹10 during the NFO and the NAV rises to ₹15 later, you can redeem them for a profit without waiting for maturity. Using an investment calculator can help you get a clearer estimate of your return (based on an assumed rate) and plan with more precision.
Close-Ended NFOs
They allow investment only during the NFO window, after which no new subscriptions are permitted. The invested money remains locked until the scheme matures. However, these units are often listed on stock exchanges. Investors can trade them, though liquidity may be limited.
For instance, you invest ₹50,000 in a 5-year close-ended debt NFO. You cannot withdraw until maturity, unless you sell on the exchange.
Hybrid (Interval) NFOs
Hybrid or interval funds combine features of both open-ended and close-ended NFOs. They allow investors to buy or redeem units at specified intervals, say, quarterly or half-yearly. During the rest of the time, investments remain locked.
Benefits of Investing in an NFO**
Here are some of the key benefits of including NFO in your investment plan:
- NFOs allow investors to enter at an affordable base price - usually ₹10 per unit.
- They provide an opportunity to diversify into new themes, sectors, or strategies not available in existing funds.
- The low entry cost makes NFOs accessible even for beginner investors.
- There is potential for higher long-term returns if the fund performs well in the market.
- Certain NFOs, such as ELSS, also provide tax-saving benefits under Section 80C.
- Investors can choose from equity, debt, or hybrid NFOs, based on their risk appetite.
- NFOs can complement other financial products, such as term insurance or money-back plans, for a balance between protection, savings, and investment.
NFOs in the Context of Investment-Oriented Life Insurance Plans
While NFOs are usually associated with mutual funds, they can also be available within Unit Linked Insurance Plans (ULIPs). In this case, insurance companies launch new fund offers within their ULIP investment plan.
This works much like mutual fund NFOs, where the insurer announces details about the investment objective, risk level, and asset allocation. The subscription window remains open for a limited time. You can buy this type of life insurance online or offline. Once the NFO closes, the collected money is invested as per the ULIP’s objective, and the NAV begins fluctuating with market performance.
This way, the investors not only gain exposure to a new fund but also enjoy the dual benefits of insurance and investment that ULIPs provide. Investors can use an investment calculator or a more specific ULIP calculator to plan their financial journey more effectively.
It is essential to understand what an NFO fund is before investing. While NFOs provide opportunities for diversification and growth, it is also important to be aware of their risks and their lack of historical performance. Assess your goals, compare options, and research thoroughly to make informed choices. It is advisable to reach out to a financial expert for better guidance.
** Tax exemptions are as per applicable tax laws from time to time.
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