What is a New Fund Offer(NFO) and its importance?

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New Fund Offer is the introductory offer of a scheme by an Asset Management Company. many investors show a high interest in the NFOs. but very less show interest in studying about the NFO. In this post, we will discuss the New Fund Offer and its more details.

NFO-New Fund Offer

A New Fund Offer (NFO) is the introductory offer of a scheme by an AMC (Asset Management Company). A new fund offer is launching in the market to raise capital from the public. Investors can purchase units of the mutual fund at an offer price. usually, this price will be ₹10 per unit.

Types of NFO

There are two types of New Fund Offer are there.

Open-ended funds: The open-ended fund is officially launched after the NFO ends. Investors can enter and exit the fund at any time after the launch of the fund.
Close-ended funds: Close-ended funds will not allow the entry or exit of investors after the NFO period to its maturity time. This time period is typically 3-4 years from the Inception date of the fund. as the name implies. it is a ‘Closed’ type fund. ie the fund is locked on entire its period.

Benefits of NFO investing

1.Lock in support

Usually, investors stay away from the locked-in funds because of their locking feature. but locked-in funds are very good for the investors who are having a 3-5 year investing horizon. locking the fund will help you to stay away from bad investing behaviors like unnecessary selling, random buying, etc. most importantly, there are extra tax benefits for long term investments. so lock in support is always good if you are a long term investor.

2.Freedom of large flows

Open-ended funds are effecting by large inflows and outflows. A sudden outflow will force the fund manager to sell the stocks at low prices. that will cause loss to all unitholders in the fund. On the other hand, if the investor is choosing the close-ended funds. they are locked for the entire fund period. so the fund manager can focus on stock selection and monitoring. this will make the investment more accurate and efficient

3.New strategies

Close-ended funds offer the chance to invest in new and innovative strategies that existing open-ended funds don’t have.

4.Flexibility

The closed-ended fund is having flexibility. In other words, if the market is not performing well and you made an investment in a bad time, the fund manager can hold your funds and invest some of them a little later. This flexibility helps fund managers perform well.

Also read: Benefits of mutual fund Investing

Features of the NFO

when the subscription process period is over, investors are ready to purchase the fund units at the specified price. Some of the key highlights of NFO:

The offer price is cheap than the existing fund options
there is a chance of better gains after listing
The NFO is using by Asset Management Companies to raise capital from the public,

Things to consider before making an investment in the NFO

Before making an investment in an NFO, you need to study and analyze the new fund in detail. because it is a NEW fund, there is no history and track record for this fund. so a deep study is necessary when you think about investing in NFO. The following are a few important things you must consider before investing in the NFO.

1.Objectives of the Fund

The objectives of the funds tell us asset allocation, expected returns, risk, and liquidity. this will help you to develop an idea of the capacity of the NFO. An NFOs should clearly explain its investment process, that is going to carry out for the given investment period. In other words, it means that reading the fund objectives should help the investors to understand, how the fund manager is going to manage their money.

2.Fund House Reputation

It is very important to do a background check on the fund house. before making invest just do a study about the fund house and its history. and Ensure that the fund house has a strong history of operating in the mutual fund industry of say at least 5 years to 10 years. It will help to analyze the kind of performance that the fund house delivered during market ups and downs. If the fund house is having a good track record, then the NFO may perform as promised.

3.Returns

Checking previous returns is a very important factor. you must check the track record of the funds by the fund house. previous returns record will give you an idea about the fund performance. say the last 3-5 year performance of the fund will help you to analyze and make a good decision about investing in the NFO.

4.Theme of New Fund Offer

There are numerous mutual fund scheme is there in the Indian mutual fund sector. So it is very important to understand the theme of the NFO. The investment theme must be unique and sustainable.

5.Risk factor

There is a risk factor is there in NFO investing. unlike the existing funds, there is not track records for the fund. u cannot check the previous performances. etc. you can only check the previous performance of the fund house and fund segment only. this will be a bit risky. but a detailed study with other factors will make you take a wise decision.

6.Cost of investment

The overall cost involved in mutual fund investment is one of the parameters to decide the potential returns. even there is no entry load, some funds charge exit loads if you redeem units before the completion of the time period. so If the lock period is longer than your investment horizon, your returns will be affected by the exit loads.

7.Expense ratio

The expense ratio is the annual fees charging by the fund house for managing your fund. it is another important parameter to check and analyze before you make an investment decision. It is good to check if the expense ratio and compare with the SEBI mandates.

8.Investment Horizon

Before investing in the NFO, fix a time horizon, and analyze it with the NFO’s horizon because some NFOs also come with a lock-in period. and it is ranging from three to five years. In such cases, you will have to stay invested for the entire lock-in period. once you have subscribed to a mutual fund scheme, you will not be able to redeem your units before maturity In the case of locked funds. so always make a deep study about your time horizon and match it with the NFO. there are NFO with open-ended and closed-ended schemes. so choose wisely with respect to your investing horizon.

9.Minimum Subscription Amount

The minimum subscription amount is another factor to check. it ranges from as low as ₹500 to ₹5,000. investing capacity is different for different investors. if you are not able to meet the minimum subscription criteria, it is good to choose SIP mode investing.

How to invest in the NFO

Before making investments make sure that you completed your KYC process. there are two ways to in vest in the NFO as follows.

1.Offline method

In offline method you have to visit any brokers office or you can choose the AMCs office.

Meet the authorized broker or fund house office person.
Fill the NFO forms.
Submit the necessary documents.
The process is finished. you can keep in you can with the person for the investment support.

2.Online method

The online method is the most popular and most used method for investing in the Mutual fund these days. because online investing is very easy and effortless. no need to visit the broker or any other office. you can simply invest through your mobile phone. there are many online mutual fund investing platforms are available. you can choose the best one according to your interest.

Choose your investment platform (AMC official website, 3rd party websites, mobile apps)
Register/Login to the platform
choose your desired NFO from the Lists of New Fund Offers
Choose the Fund type and investing mode
Enter the investment amount and proceed with payment.

Also read: Glossary of mutual fund terms

Final thoughts

Investing in the Mutual fund and NFO is purely a personal choice. In this post, we discussed what is New Fund Offer (NFO) and its importance. study well before you make an investment in the NFO. make your investment decision wisely. I hope this post will give a good idea about the New Fund Offer.

Happy Investing