NFO - New Fund Offering

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What is an NFO?

NFO or a New Fund Offer is the subscription offer by an Asset Management Company to launch a new category of fund. The asset management company issues an NFO to raise capital to buy securities and to add to the new fund. An NFO is widely used for marketing mutual funds where the AMC sells the initial fund shares to the investors. 

How Does NFO Work?

An NFO is a new fund, majorly a mutual fund scheme that is first made available for investment to the investors. To understand NFO meaning in detail, it is necessary to understand an NFO’s objective–to accumulate adequate initial capital from the NFO applicants and ensure that the fund manager can build an ideal portfolio based on the fund’s investment objectives. An NFO is issued by an AMC and open to investors for a specific period during which they can apply to the NFO, similar to an IPO.

Why NFO is a good opportunity?

NFO mutual funds are tremendously popular among investors as they have the potential to provide significant gains after the units begin to trade publicly. When investors invest in NFO mutual funds, they effectively diversify their portfolios as mutual funds are known to offer immense diversification.

Furthermore, NFO mutual funds allow investors to invest in various innovative funds that are focused on the emerging sectors of the economy or newer companies that have become public after an IPO.  One of the most significant reasons why NFO mutual fund is a good opportunity is their excellent value-for-money. As NFO mutual funds are cheaper than other funds in the market, they have the potential to offer higher gains.

Types of NFO

There are three types of NFOs (New Fund Offers):

• Open-Ended New Fund Offer (NFO): Open-ended new fund offers are issued to accumulate an initial corpus to purchase shares for the mutual fund unit. An open-ended new fund offer (NFO) does not resist the number of shares that can be issued when the NFO is live. During that period, and after it expires, the investors have no restrictions on making subsequent purchases and redemption requests. Such NFOs do not trade on an exchange but are managed by the AMC or its associates. 

• Close-Ended New Fund Offer (NFO): Close-ended new fund offers to restrict the number of shares as they issue only a specified number of shares during the NFO. These types of NFOs are the most highly marketed new fund offers, trade on a stock exchange, and are associated with daily quotes throughout the trading sessions. Close-ended NFOs allow the entry of investors only when the NFO is live. Once the NFO mutual fund expires, investors can not buy new units or make redemption requests.

• Exchange-Traded Fund: Currently, Exchange-Traded Funds are also launched through the issuance of a New Fund Offer (NFO). Exchange-Traded Funds are a type of mutual fund created to track the performance of a specific index such as Sensex, NIFTY 50, NIFTY Next 50, NIFTY Bank, etc. Exchange-Traded Funds launched through an NFO also trade on the stock exchanges and come with no buying and redemptions restrictions.

Things to Consider before Investing in NFO

NFOs and upcoming NFOs can excite investors as they can realise good profits. However, similar to shares, not every NFO can provide hefty gains to the investors and may force them to lose out on the value of the invested capital. Hence, it is vital to understand the factors that should be considered before investing in an NFO:

• AMC’s Goodwill: While issuing a new fund through an NFO, the funds previously issued by the AMC are available in the market with information on their financial performance. Analysing the reputation and goodwill of the AMC based on the performance of previous funds can become an effective factor before investing in the NFO.

• Objectives: The objectives of the NFO mutual fund provide vital details about the risks, expected returns, asset allocation, liquidity etc. Before investing in a new fund offer, investors should consider the motive behind the fundraising and the fund manager’s purpose for using the money. Only when the objectives are clear that an investor should apply to the upcoming NFO.

• Expected Returns: Before investing in a NFO, investors should compare the potential returns of various similar funds that are currently trading in the market. It can allow for an effective understanding of the returns that the NFO can provide to the investor. They can also consider investing in the NFO mutual fund if the return potential is ideal. 

Benefits of Investing in NFO

NFOs witness extensive demand from investors owing to the benefits New Fund Offers provide in terms of diversification, profits etc. However, the investment objectives, the reason for the fund, and the expected ROI are offered with clarity before commencing the investment. Listed below are the benefits of investing in existing and NFOs:

    ● Flexibility: NFOs, especially close-ended funds, provide the flexibility to retain a portion of the investment fund to be invested later when the time is apt. It may be that the market sentiment at the time of the New Fund Offer is negative, or the NFO mutual fund is launched when the market is at its peak. Regardless, the fund manager has the flexibility to hold a portion of investors’ funds to invest later.

    ● New Asset Classes: When investors invest in an NFO mutual fund, they may choose a fund that allows them to have exposure to a newer asset class or stock market index. Such investments offer portfolio diversification, along with added exposure to realise better returns.

    ● Expense Ratio: One of the most important benefits of investing in NFO mutual funds is their low expense ratio. The expense ratio is the measure of the percentage value of funds used for administrative, management, advertising, and all other expenses.

    ● New Strategies for Investment: Close-ended funds offer great opportunities for investing in both innovative and new strategies. However, these strategies might not be provided by the existing open-ended funds.

     ● Lock-in Support: Spending sufficient time in the market holds great value instead of backing out within a very short span of time. Most investors tend to spend only two years in the market, thereby impairing their returns. Nonetheless, the lock-in period offered by close-ended funds for 3-4 years prevents investors from being influenced by bad investing behaviour.

    ● Zero Large Flows: Unlike open-ended funds, investors are locked-in close-ended funds. This lock-in feature is implemented and implemented according to the fund’s tenure. Further, the fund manager focuses on appropriate stick selection and tracking.

How to Invest in NFOs with 5paisa?

5paisa is one of the leading brokerage firms in India and is a one-stop solution for all trading and investing needs. Follow the below steps to invest in a New Fund Offer with 5paisa.

• Login to your 5paisa Account. If you do not have an account, you can create a new one in 3 easy steps!
• Once you have logged in to your account, search for your preferred mutual fund scheme or explore “All Mutual Funds”. 
• Select the best NFO mutual fund according to your criteria. 
• On the fund page, you can read all the additional information about the NFO mutual fund, such as fund managers, holdings, asset allocation etc. 
• Select the investment type – SIP or Lumpsum for the New Fund Offer you have chosen. 

Proceed with Payment. Once you have completed the payment, you will receive a confirmation text and email from 5paisa confirming that you have successfully applied to the NFO.

How is a mutual fund NFO different from a company IPO?

There are plenty of investors who consider new fund offerings and IPO to be equivalent. But they are as different as ice and fire! Here, in this section, we have listed some of the key differences between NFO and IPO. They include:

● Company IPOs come with completely different quotas for NICs, retail investors, and QIBs. There are some IPOs that provide additional discounts for retail investors. However, there are no special benefits for retail investors, especially mutual fund NFOs.

● IPO is either fresh funds that are being raised for the company or an offer sale. A new mutual fund is typically for fresh fundraising, and the fund amount that can be raised comes with no limit.

● In the case of an IPO, fund usage is immensely crucial as it determines whether the IPO fund will value the investor. And for NFO funds, the market level is extremely important as it determines the valuations at which the fund will invest.

● For IPOs, the critical aspect of valuation is entirely based on the P/E ratio, P/BV ratio, etc., that goes into IPO pricing. But for the upcoming NFO, there are no queries regarding the valuations. It’s because the collected amount is divided into units and is invested in the market.

Who launches IPOs, and who launches NFOs

Well, in the case of an IPO, it is launched by a company that wishes to raise money from the public. Most notably, there are two types of IPOs:

● Fresh Issues: Here, the company raises fresh funds in the market. This fund-raising can be for expansion, debt repayment, diversification, etc.

● Offer for Sale: Here, the early investors or promoters offload their stake through the IPO. But for IFOs, the share capital probably remains the same, where the company only gets listed.

On the other hand, latest NFOs are typically launched by mutual fund houses or AMCs. But the primary idea of an NFO is to launch a new fund idea within the market. In fact, NFOs tend to remain concentrated around the market peaks.

Nevertheless, plenty of the NFO ideas could be constrained after SEBI passed the new MF regulations on fund categorization. Another popular source of new NFOs is when the AMCs fill up the gaps in their fund offerings through NFOs.