NFO or New Fund Offer Explained: Whenever there is talk of mutual funds, one word that is often heard is “NFO” i.e. New Fund Offer. But what is the actual meaning of NFO and what things should be kept in mind before investing in it? How different is the NFO of a mutual fund from the IPO of a company, let us know the answers to all these questions.
What is the meaning of NFO?
When a mutual fund company (AMC) launches its new fund, investors are given the opportunity to invest in it at the rate of Rs 10 per unit. This is called New Fund Offer or NFO. After raising capital through NFO, companies invest it in the market according to their investment strategy. Even after the subscription of NFO ends, investors can invest by purchasing the units of that fund as per the current NAV (Net Asset Value) at that time.
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Difference between IPO and NFO
NFOs are often compared to IPOs (Initial Public Offerings), as both provide an opportunity for initial investment. But there are several key differences between NFOs and IPOs.
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In an IPO, the issue price of a company’s equity shares is decided on the basis of its fundamentals, i.e., sales, profits, market position and future prospects. The demand for the company’s shares also plays a major role in this.
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The issue price of the share is also linked to the overall current valuation of the company’s business.
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Even though the face value of a share issued in an IPO is Rs 10, its issue price is usually much higher than that.
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The issue price of one mutual fund unit in NFO remains fixed at Rs 10.
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The price of a mutual fund unit in an NFO has nothing to do with the past business valuation of the mutual fund house or the asset management company (AMC) that is launching the scheme.
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After the NFO, the price of a mutual fund unit is determined based on its net asset value (NAV). This price is linked to the latest value of investments made through that fund.
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After the IPO, the price of the company’s shares in the market is determined by the combined effect of its demand-supply, the company’s current performance and future prospects and market sentiments.
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The company’s shares are publicly listed through an IPO. Investors who buy the shares become shareholders of that company.
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The purpose of an NFO is to launch a new fund, which is invested in shares of different companies, debt instruments or any other asset class already announced.
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What things should be kept in mind before investing in NFO?
For your convenience, we are providing a checklist of things that are important to consider while deciding to invest in any new fund offer. If you pay attention to these 9 things while making any decision about investing in NFO, it will help in taking the right decision.
1. Objective and strategy of the fund
Before investing in an NFO, it is important to understand what the objective of the fund is. Which sector, market cap or theme will the fund focus on? Knowing this will help you understand whether this NFO matches your investment goal or not.
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2. Experience of the fund manager and AMC
The role of the fund manager is very important in the success of any fund. Especially in active funds, the role of the fund manager is even more important because all the investment decisions in such funds depend on his understanding.This is why it is important to check the track record and experience of the fund manager and AMC before investing in an NFO. Based on the performance of their previous funds, you can guess how successful they have been in managing funds so far.
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3. Expenses and fees
Before investing in NFO, it is important to get information about all the expenses like entry and exit load, management fees. Comparing this information with the funds already available in the market will help you in making the right decision.
4. Lock-in period
Some NFOs may have a lock-in period during which you cannot redeem your units i.e. you cannot sell them and withdraw your money. The lock-in period affects the liquidity of your investment, so it is important to pay attention to it.
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5. Market environment
It is also important to see the market environment while launching an NFO. If there is volatility in the market or the market is at a very high level, then it can affect the initial performance of the fund.
6. Past performance of similar funds
Although an NFO does not have its own track record, you can look at the past performance of similar funds of the AMC or fund manager who launched it. This can give you an idea of the prospects of the new fund.
7. Risk factors associated with mutual fund schemes
It is also important to know the risk factor associated with NFO. For this, one should understand the objective and strategy of the fund. If the fund is high risk, then before investing in it, see whether you can take that much risk or not.
8. What is the long term prospect?
When an NFO is launched, do not invest in haste by getting influenced by its theme, the name of the fund house or any one thing. It is very important to understand whether the fund being launched through that NFO has the potential to give better returns in the long term or not.
9. Regulatory History
It is also important to see what is the past history of the mutual fund house or AMC launching the NFO in terms of compliance with all the rules and regulations. Whether the company launching the NFO follows all the rules and best practices of functioning during fund management or not.
There will be an opportunity to invest in the fund in future also
One should always keep in mind that NFO is not the only opportunity to invest in any open-ended mutual fund scheme. Even after the subscription period of NFO is over, you can buy the units of that fund anytime. So even if you are very impressed with the concept or theme of a new fund, instead of rushing to invest in its NFO, you can take a well-thought-out decision.
