Mutual funds often seem like a complicated investment to many but it’s not really so, at least the investment and returns part of it. To properly understand mutual funds, it is best to break it down into its key components and go through each segment bit by bit. Here the focus is on New Fund Offer of Mutual Fund or Mutual Fund NFO.
NFO:
NFO stands for New Fund Offer which is a period during which the first subscription offering for a new mutual fund is made. NFOs are made by mutual fund houses i.e. Asset Management Companies for the benefit of interested investors. A NFO is made at the time of launching a new fund. This allows the fund house to raise capital for purchasing securities to create the mutual fund portfolio. Mutual funds are one of the most common types of new fund offerings marketed by an asset management company. The initial purchase offer for a new fund varies as per the fund’s structure and stated objectives.
NFO is similar to an Initial Public Offering (IPO). Both represent the AMC’s attempts to raise capital for further operations. New fund offers are often accompanied by aggressive marketing campaigns created to entice investors to purchase units in the fund. New fund offers usually have the potential for significant gains after beginning to trade publicly but as they have no previous track record of operations, they can also be potentially risky investments.
Applicability of New Fund Offers:
New Fund Offers are applicable for both open and closed-end mutual funds. Additionally, exchange traded funds (ETFs), a subtype of equity mutual funds, are also offered through NFOs. Below are key details on how to invest in a few of the common types of mutual fund NFO available in India:
- Open-Ended Fund: As part of their NFO, open-ended funds allow investors to purchase scheme units directly from the AMC as well as through its RTAs and designated brokers. These funds do not limit the number of units that can be bought / sold from a brokerage firm on their initial launch date and at later dates too. The NFO price of a mutual fund is same as the face value of each scheme unit. Open-end mutual funds report net asset values (NAV) daily when the market is closed i.e. at the end of each business day. Mutual fund institutions can launch new fund offers for new strategies or add additional share classes to existing strategies.
- Closed-End Fund: These funds are often some of the most highly marketed new fund issuances as these only allow investments during their NFO period. At the closure of the NFO period, investors can no longer make additional/fresh investments into the scheme. Closed-end funds trade on stock exchanges with daily price quotes throughout the day. Investors can buy closed-end funds on their launch date through a brokerage firm or directly from the fund house/designated RTA.
- Exchange-Traded Fund (ETF): New exchange-traded funds (ETFs) are also launched through a new fund offer. ETF feature real time market price changes similar to share but their portfolio ifs comprises of multiple securities similar to mutual funds. Thus ETFs are considered to be a special type of mutual fund which can be freely traded on stock exchanges.
Mutual Fund NFO Launch and Alerts:
Mostly, Mutual Fund NFOs are not widely publicised which can make them challenging to identify. Companies must register a new fund offering with the Securities and Exchange Board of India (SEBI) which is one method of tracking as details of these are available on the SEBI website. Investors who are seeking information on new fund offers about their launch date may also receive alerts from their brokerage firm as well. Financial news outlets and news aggregators are also a good source for information on Mutual Fund NFOs.
Difference between NFO and IPO:
Here is a detailed differentiation between New Funds Offer of mutual funds and Initial Public Offering of shares.
| NFO | IPO |
| With NFO mutual funds, all units are issued at NAV equal to the face value of scheme units. Investor’s contribution is used to invest in stock and debt instruments that form the scheme’s future portfolio. At the time of NFO listing, the scheme NAV is calculated as per the current value of all mutual fund investments and cash holdings of the scheme. Thus, subsequent to a NFO, a mutual fund scheme takes around 15 days to release the preliminary portfolio information. The investor will make listing gains or loss depending on the performance of stocks during this period.
Unlike IPO, NFO mutual funds scheme are usually not oversubscribed. Investors can buy units even after NFO listing. |
In IPO, the company getting listed on the stock market offers a limited number of company shares for subscription at predetermined price band. Shares of companies with good financial track record and management are always in demand.
There is price discovery of share price based on demand and supply in the market on IPO listing day. Thus unlike mutual fund IPO units, company shares may list at price higher or lower than the base IPO offer price. |
Why Invest in NFO Mutual Funds?
There are certain scenarios where you can consider buying NFO units of mutual funds or ETFs. Many investors subscribe to an NFO primarily because unit NAV is priced at exactly Rs. 10 per unit, which seems cheap. On the other hand, existing open-end schemes have higher NAVs and thus higher unit price. Wealth managers usually suggest that investors avoid closed-end NFOs which they cannot redeem prior to maturity. Investors are advised to stick to open-end schemes from mutual fund houses with a good track record.
For existing schemes, the portfolio and the fund manager’s style of investing are already known. However, one does not know much about the scheme undergoing an NFO. Missing details of the scheme to consider here include portfolio diversification and how much assets the fund will gather. Financial planners always suggest that investors invest in an NFO only if it has something different to offer from the existing funds or provides a specific type of diversification which cannot be achieved through an open-ended fund.
Frequently Asked Questions (FAQs):
Some of the frequently asked questions about Mutual Fund NFOs are as follows:
Q. What is Mutual Fund NFO SIP?
A. A mutual fund NFO is usually launched by a fund house either on demand from investors or to complete/augment its product basket. As equity markets become bullish, mutual fund NFOs improve with it. NFOs could be opted in both open and closed-end formats for market segments such as debt, fixed maturity, hybrid funds and equity schemes. Investors can willingly invest in any mutual fund NFO scheme through both lump sum and SIP investment plans. This entirely depends on their financial capability and investment habits.
Q. Do banks offer NFO Mutual Funds?
A. No, NFO Mutual Funds are often offered by brokerage businesses of prominent banks such as SBI, Standard Chartered, Kotak and ICICI as part of the mutual funds channel, the scheme NFO units themselves are offered by the designated fund house. For example though one might purchase NFO units of a Kotak mutual fund from the Kotak Bank brokerage, the scheme itself will be offered by Kotak Mutual Fund AMC i.e. the fund house of Kotak. Similar situations occur in case of ICICI Mutual Fund AMC and SBI Mutual Fund AMC to name a few.