What is NFO? How New Fund Offers Work and Their Benefits

What is New Fund Offer (NFO)?

A new fund offer (NFO) is when a mutual fund company also known as Asset Management Company launches a new fund. Unlike existing funds that have been running for a while, an NFO is completely new. It doesn't have any past record to show how well it has performed. Instead, it only has plans and goals written in its offer document. These plans tell investors what the fund aims to do with their money. NFOs give investors a chance to join a new investment right from day one.

How does NFO work?

When launching a new fund, the company first announces its plans. They explain what the fund will do and where it will invest the money.

1. Initial Investment Period: During an NFO, you can buy units of the fund at a set price - usually ₹10 per unit. The company gives people a few weeks to invest in this new fund at this special price.

2. Post-NFO Operations: The main purpose is to collect money from investors. Once enough money is collected, the NFO period ends. After this, no one can buy units at the initial price anymore.

3. Fund Management And Trading: After the NFO ends, the fund starts investing the collected money according to its plans. Post NFO timeframe, you can still buy and sell units of the fund, but the price will change daily based on the fund's net asset value (NAV).

Who Launches NFOs?

NFOs are launched by Asset Management Companies (AMCs). These companies introduce new mutual funds to the market as they feel the need for a specific fund in response to either market demands, or to expand their existing product portfolio. These AMCs provide investors with information like:

• The fund's investment objective

• Asset allocation strategy

• Target stocks for investment

• Types of securities to be included

• Identity of the fund manager

Benefits of Investing In NFO

Investment Entry Point: NFOs provide an appealing starting point for investors by offering units at a fixed, lower price of around ₹10.

Growth Potential: Early investors can potentially benefit as the fund grows and matures. This happens only when fund managers execute their investment strategy effectively.

New Investment Approaches: These new funds sometimes introduce innovative approaches that aren't found in existing investment options. This gives investors fresh ways to diversify their money.

Risk Distribution: When you invest in an NFO, you can spread your investments across different types of assets. This becomes valuable if the fund focuses on a specific or emerging sector.

Types Of New Fund Offers

There are two main types of NFO in mutual funds:

Closed-Ended Funds

Closed-ended funds are a limited-time opportunity where you can buy units, typically at Rs. 10 each. Once this initial period ends you can't buy new units anymore. These funds come with a fixed deadline, like a 3-year or 5-year plan. If you want to sell your units before the end date, you can only do it on the stock exchange. SEBI (the market regulator) makes it mandatory for these funds to be listed on the exchange to ensure investors can sell if they need to.

Open Ended Funds

In an open-ended fund, you can buy or sell your mutual fund units anytime. This makes them perfect for people who don't want to be tied down to a fixed schedule. With these funds, you can even start small and add more money whenever you have extra savings. Such types of funds are suitable when you have different financial goals with varying investment duration.

Who Should Invest In NFOs?

Experienced Investors: Investors who have a solid understanding of mutual funds and market dynamics should consider NFOs. Since NFOs don't have a track record, it takes experience to evaluate their potential and their match to your investment goals.

Risk-Tolerant Investors: People who can handle market uncertainty and potential volatility should consider NFOs. Since these funds don't have historical performance data, they carry additional uncertainty compared to established funds.

Goal-Aligned Investors: You should consider NFOs only if they align with your financial goals. For instance, if you're building a retirement corpus with a 25-30-year horizon, an NFO with a unique long-term strategy fits your purpose.

Diversification Seekers: Investors looking to access a new market segment, investment strategy, or asset class that isn't currently available through existing funds might find value in NFOs.

How to Invest in NFO?

You can invest in an NFO through both online and offline modes. Before investing, check your KYC status. An incomplete KYC will lead to the rejection of your application.

Offline Mode

Fill out a physical application form and submit it either through a broker or directly at the AMC office. If you choose a broker, provide the necessary documents and payment. Brokers often guide investors on fund selection and SIP options. Double-check all information, sign the form, and submit it to complete the process.

Online Mode

You can also invest through AMC's website or third-party platforms. Log in or register using a username, password, and authentication. Search for available NFOs, select the fund, and decide on your investment amount. Online platforms also offer tools for guidance. Finally, choose between a lump sum investment or a Systematic Investment Plan (SIP) to complete your investment.