Introduction

If you are a mutual fund investor or willing to be one, you have to master the art of timing your investments. Since mutual funds primarily rely on equity stocks or debt instruments, knowing when to invest is as important as knowing where to invest. So, what is NFO? Simply put, it provides you with a golden opportunity to increase the returns from your investments. 

Scroll down to know more about what NFO is in mutual funds and how you should use it to increase your returns from mutual fund investments.

 

Understanding New Fund Offers (NFOs)

When a mutual fund house or AMC (Asset Management Company) decides to launch a new mutual fund scheme, they make a New Fund Offer, popularly known as the NFO. Hence, the straightforward answer to the question ‘What is NFO in mutual funds?’ is that it is an introductory offer of a mutual fund scheme that provides investors with the opportunity to catch a fund early and reap rich dividends. 

An NFO allows a mutual fund house to raise the money required to purchase stocks or debt instruments. AMCs generally offer a subscription period between ten (10) and fifteen (15) days for customers to buy units at INR 10 per unit NAV. AMCs issue units to investors on a first-come, first-serve basis. 

Investors may invest in two types of funds during the NFO period. The following section elaborates on the fund types.
 

Types of New Fund Offers

Now that you have understood the New Fund Offer (NFO) meaning, let us understand about the type of NFOs in mutual funds.

Here are the two mutual types you may choose while investing in a mutual fund scheme during the NFO period:

1. Open-Ended: An open-ended mutual fund allows anytime entry or exit. You can invest in an open-ended mutual fund in three ways - as a lump sum during the NFO period, a lump sum after the NFO period, and as SIP (Systematic Investment Plan). However, some equity and debt mutual funds charge an exit load on withdrawals before one/two/three years from the investment date. 

2. Close-Ended: As the name suggests, a close-ended mutual fund scheme does not allow premature withdrawals. These funds usually do not permit SIP investments, except in ELSS (Equity Linked Savings Scheme). ELSS funds are preferred by investors willing to get tax benefits of up to INR 1.5 lakh under Section 80C. Close-ended mutual funds typically mature after three to four years from the investment date.

Let us understand the open-ended NFOs and close-ended NFOs with an example:

Consider the following scenario. An AMC issues a one-year closed-ended Fund  NFO called X. It fixes the Net Asset Value i.e. NAV at Rs.100 for each unit, with a total of 100 units, resulting in a total capital of Rs10,000. The expected yearly return on investment is 15% p.a.

At the time of Fund X's debut, an individual called A chooses to purchase 10 units of it. After a few months , the tradeable fund's price increases to Rs. 120 per unit as a result of a positive market phase, and A trades all of the units on the stock market. After a few months, A purchases 10 units of X for Rs110 and keeps them until the end of the year, after which they are redeemed. The firm delivers Rs100 per unit of the fund and returns Rs.15 per unit. The profit made by A in cash is Rs.250. Fund X could have been redeemed at any moment if it had been an open-ended fund with the same NAV of Rs100 for each unit and an annual rate of return of 15%, but no restriction on redeeming the total number of units or total capital 

There is one other type of NFOs called interval funds. These are a hybrid of closed-ended and open-ended funds. They are closed-ended funds, although they do allow for acquisition and redemption through the AMC portal at periodic intervals, which might be yearly or semi-annual.
 

Advantages and Disadvantages of an NFO

Following are some of the advantages of NFO:

● Provide the chance to invest a little amount of money when the price of current Mutual Fund units is greater in a particular topic, such as tax savings, or a certain industry.
● If you want to invest in a certain sort of mutual fund for an extended period of time, NFOs are excellent. They are thus most appropriate for long-term investors.
● You have an investing opportunity if you think a certain business or sector will see growth in the future and an AMC launches that particular NFO.
● Compared to purchasing the same later in a lump payment or through Systematic Investment Plans, you can obtain a greater number of units through an NFO (SIPs).

Following are some of the disadvantages of NFO:

● The NFOs have never been introduced before, hence they don't have any historical performance data. It becomes challenging to evaluate its performance as a result.
● The possibilities of diversification are minimal in NFO. Generally the AMCs tires to re-bundle the existing portfolio in the name of NFO providing less or no diversification.
● An NFO may not be cost-effective since its beginning costs are higher than those of mutual funds that are already well-established.

 

How to Invest in an NFO?

New fund offers can be invested in both offline and online modes. A word of caution before you contemplate investing in a fund's NFO. However, to invest you must have completed your KYC, therefore verify your KYC status first before investing. 

If you apply for the NFO and it is discovered that you are a KYC non-compliant, then your application will be refused. 

Consider the following for investing in NFOs both online and offline:

●  Investing in NFO Via Offline Mode

 After establishing your KYC status, you fill out a physical form and sign it through your folio number or other data. It is customary to invest in NFO offline through a broker, although it is also possible to do so directly via the AMC office. You will be led through the procedure by the AMC. Contact the broker and send the paperwork, the check, and other information if you are using an approved broker. The broker will often serve as both a financial counselor and a fund selector, giving you advice on SIP, fund selection, and other matters. In case you already have a folio number for the particular AMC, all you need to do is enter it, and the system will get the most of your data.Completely fill out the offline form, double-check the information, and deliver it to the broker once you have signed it. 

●  Investing in NFO Via Online Mode

You can choose to invest in NFO through online mode directly through the website of the AMC or with the help of third-party apps like 5paisa. You can invest online after checking your KYC status. You may use the mobile app or the browser interface.First, you must log in or register for an account with your online trading platform using a unique username, password, and second-level authentication.


On the website itself, you may look up the NFOs that are offered. You will typically receive all the information on NFO investments from your online broker.
Based on your suggested allocation, choose the ideal fund to invest in and the appropriate investment amount. You can find online tools to assist in the process.
Lastly, you need to choose whether you wish to make a lump sum commitment or a series of smaller investments.
 

Things to Keep in Mind Before Investing in NFO Funds

The following are some parameters you must evaluate before investing in NFOs:

●  Background Check: Investing in an NFO might give your investment an edge. However, before investing, you need to check the fund house’s legacy and fund managers’ experience (read, performance record). If you need help, head to 5paisa. 5paisa makes your task easy by automatically picking the best-performing funds suiting your investment goals. You can check the track record and invest in the best fund within minutes. 

●  Risk Management: As a fact, mutual fund investments are riskier and often more rewarding than conventional investment options. Hence, it is wise to evaluate your risk-taking capability before investing in an NFO. Since debt funds invest in low-volatile government and corporate bonds, conservative investors mostly prefer investing in these funds during the NFO period.   

●  Scan The Offer Document Carefully: Many investors rely solely on the available data without reading the offer document carefully. As an informed investor, you must scan the offer document entirely to understand the investment rationale, benchmark, and tentative portfolio.  

●  Minimum Investment and Withdrawal: Mutual fund houses generally specify the minimum investment amount for NFOs. The amount typically ranges between INR 500 and 5000. It would be best to consider the investment amount and exit load (in the case of open-ended funds) before investing.  

 

Benefits of Investing in an NFO

Here are the best benefits of investing during the NFO period:

●  Stability: Close-ended funds offer mutual fund managers the opportunity to utilize the capital better since they do not have to factor in frequent or bulk redemptions. Hence, the fund managers of close-ended mutual funds might not get swayed by short-term volatility in prices, resulting in higher profits. Since you can invest in close-ended mutual funds only during the NFO period, investors prefer NFOs. 

●  Agility: When you invest in an open-ended fund, the fund manager is obliged to invest your funds in the market irrespective of the valuations or market conditions. So, if the market is at its peak and slated for a reversal, your investment might be at risk. In contrast, when you invest in a close-ended fund during the NFO period, the fund manager has more significant liberty to hold on to the funds until the market becomes steady.  

●  Avoid Wild Swings: When too many people think negatively about the market sentiment, they sell their stock and mutual fund holdings. And, when many investors place redemption requests, the fund manager might be forced to sell their holdings to fund the redemption requests. So, even if the fund manager believes that the market will eventually revive, they cannot apply their good judgment. And, selling holdings suddenly might affect all investors invested in the scheme. Sensible investors invest in close-ended funds during the NFO period to avoid such wild swings. 

Now that you know what NFO in mutual funds is and its various benefits, it’s time to use a mutual fund calculator to estimate the returns and invest accordingly. 5paisa provides a comprehensive overview of the best performing funds in all categories so that you can select the best one for your investment needs.
 

Conclusion

Now that you know what NFO in mutual funds is and its various benefits, it’s time to use a mutual fund calculator to estimate the returns and invest accordingly. 5paisa provides a comprehensive overview of the best performing funds in all categories so that you can select the best one for your investment needs.

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