What Is NFO And How You Can Invest In Them
NFO is New Fund Offer. NFO, or New Fund Offer, is an opportunity for buyers to invest in a new mutual fund scheme.
These are just like IPOs, or initial public offerings of public companies, where the first shares of the company are offered to the public for the first time.
The funds collected through IPOs are used for business expansion, and the money raised from the subscribers of NFOs is used to purchase bonds, stocks, and securities.
NFOs are typically launched by asset management firms at a cost of Rs 10 per unit of the new MFS (mutual fund scheme).
NFOs can be subscribed to for a limited time, and then investors can subscribe to units of the new mutual fund scheme. Though NFO units can be purchased after the NFO period has ended, they will be sold at a higher price than the one offered.
Different types of NFOs:
Open-ended NFOs:
In an open-ended fund, investors can join and exit the units of the new mutual fund scheme through NFO at any time. The open-ended new fund scheme units can be endorsed by the public at the time when the NFOs are open for subscription.
Close-ended NFOs:
In the NFO period, only a pre-decided and small number of units of closed-ended funds are offered by asset management companies. The units of closed-ended funds through NFOs cannot be purchased once the offer is over, as happens in the case of open-ended NFOs. Also, you cannot exit at any time; it is only possible after a predetermined maturity period.
Things to consider while investing in NFO:
Reputation of the fund house:
Before investing, it is highly important to do a background check on the fund house. The fund house in which you intend to invest must have a proven track record in this industry. The track record of the fund house in recent years helps in analyzing the performance of NFO as well.
Objectives of the fund:
The objectives of the fund involve the distribution of assets, risks, and returns. All these factors and others too must be clearly stated in the offer document. The investment process should be crystal clear to the investor before investing. If you want to be an informed investor, you must read the offer document thoroughly.
Expected Returns:
Before investing, it is highly important to track the previous returns. You can compare the results with the rate of return that you expect from the NFO and invest accordingly.
Investment Cost:
The cost of an investment is one of the essential factors to consider before investing. If you redeem the units before the fixed tenure, NFOs might charge you with exit loads. Fund houses charge you an annual fee for managing the money, which is also known as the expense ratio. You must compare it with SEBI instructions.
Minimum Investment Amount:
Generally, NFOs declare a minimum amount for investing in NFOs, which is a crucial factor for you to consider while investing. You need to check if the minimum subscription amount is higher or lower than your capacity to invest.
Investment scope:
If you are planning to invest in NFOs, you must check the lock-in periods. If the NFO has a lock-in period, you can’t redeem it before maturity or you will be charged an exit load for it. You must evaluate this factor regarding your flexibility during the lock-in period.
Benefits of investing in NFOs:
A unique idea:
You get a chance to invest in a new idea or theme. An asset management company may initiate an NFO with a set theme, and investors can invest in it based on factors such as objectives, the risk involved, and profitability.
Investment added to the stock portfolio:
Here is another benefit of investing in NFOs. If you need exposure from an investment in your stock portfolio, you can invest in the NFO of a new mutual fund. For example, if you are interested in adding foreign stocks to your stock portfolio, you can invest in NFO index funds with experience in foreign markets.
Flexibility:
The flexibility factor is beneficial for NFOs in closed-ended mutual fund schemes. As in such schemes, investors are not allowed to exit easily after the NFO period, and the fund manager can keep the funds on hold even in the case of a stock market crash. In that way, the investor makes a better investment decision. However, due to huge inflows and outflows of funds, open-ended mutual funds get affected. This happens more during an unstable stock market.
Long-term investment:
If you are planning to invest in a specific mutual fund for a long period, NFOs are a great option.
Stability:
The mutual fund managers in closed-ended funds can use the funds more appropriately as they don’t have recurring or mass redemptions. In closed-ended mutual funds, the fund managers do not get influenced by short-term fluctuations in prices. This results in higher profits. Investors prefer NFOs because they can invest in closed-end mutual funds only during the NFO period.
Agility:
In the case of an open-ended fund, the fund manager has to invest your funds regardless of the marketing conditions. Your investment might face a risk if the market views it as high. It doesn’t happen with closed-ended funds. In closed-ended funds, you invest during the NFO period, and the fund manager can hold your funds until the market becomes stable.
How to invest in NFO?
You can invest in NFO through online or offline modes:
Online mode:
-You can invest in NFO online through your trading or demat account. The other way to invest in NFO is through mutual fund platforms, and you can do that from anywhere.
Offline mode:
-You can also invest in NFOs through mutual fund distributors or brokers. They provide you with all the necessary information and assist you in filling out and submitting all the important documents.
Now that you have a fair idea about the NFO, its benefits, and how to apply for it, you can find more information on financing options here:https://www.piramalfinance.com/about-us/company