Everything You Need To Know About A New Fund Offer (NFO)

Mutual fund investors must have, at least once, received an email from a Fund House or AMC describing their New Fund Offer (NFO) and why you stand to benefit from it.  Check your inbox. Even YOU may have received one!

But even if you’re not a mutual fund investor, don’t worry. This blog has you covered. We’re going to tell you everything you need to know about NFOs, right from what an NFO is, to if you should invest in it.

Important: This blog is meant to educate readers and the information furnished here is not to be construed as investment advice from Cube Wealth. 

What Is A New Fund Offer (NFO)?

Whenever a Fund House launches a new mutual fund scheme, it needs to raise capital to invest in stocks, bonds, and other financial securities. In such a case, the Fund House does what any logical fund seeker would do:

It allows public investors to subscribe to the newly launched mutual fund scheme for a relatively small amount of money.  This is known as a New Fund Offer. 

The Fund House will use the capital generated through an NFO to buy stocks, bonds, and other securities. Every mutual fund that is currently thriving or sinking was once launched through an NFO.    

Understanding New Fund Offerings

A New Fund Offer is open for a fixed duration of time and is available for a predetermined offer price. The NFO price in India is generally fixed at ₹10. 

Thus, you can access the fixed NFO price only for a limited time. Once the NFO period ends, you will have to buy and sell units of the mutual fund scheme as per the NAV on the given day.

Types Of New Fund Offerings

A New Fund Offer is broadly categorized into two types:

1. Open-Ended Mutual Fund NFO

An open-ended mutual fund NFO scheme allows NFO investors and new investors to buy and sell the units of the mutual fund at any time. 

2. Close-Ended Mutual Fund NFO

A close-ended mutual fund NFO scheme does not allow NFO investors to exit the fund before maturity (lock-in period). Generally, the maturity period ranges from 3 to 5 years. 

This type of fund can also be traded on the stock exchange but there are rarely any takers because of the lock-in restrictions. 

How NFO Is A Good Opportunity?

An NFO is a safer, less talked about alternative to an IPO. Of course, one could argue that NFOs are less talked about because they're less frequent than IPOs. 

But in this case, infrequency has no impact on the desirability of the offer. For starters, NFOs are cheap. You can buy a unit during an NFO for ₹10. 

Furthermore, historical data suggests that NFOs do have the ability to generate profits after the NFO period, in that, the NAV may rise to a price more than ₹10.

Fund Houses put a lot of emphasis on marketing the NFO in a catchy and effective way. Remember the introduction that spoke about NFO emails? That’s just one example of NFO marketing. 

The truth is, no amount of marketing gimmicks can forecast the actual performance of the mutual fund scheme. There are risks to an NFO that you must weigh before investing your hard-earned money in it.

Risks of Investing In An NFO

Eleanor Roosevelt said, “The past is history, the future is a mystery”. In the case of an NFO, both the past and future are mysteries. There’s no historical performance that you can track. 

Instead, the focus shifts towards the fund manager’s track record and the Fund House’s capabilities, both of which do not guarantee future success.  

If you’ve seen a mutual fund ad, you know that even existing mutual fund schemes come with a disclaimer. But there’s solid historical data to go by and a play-by-play record of the fund manager’s trading habits.

Moreover, a proven mutual fund advisor like Wealth First, Cube’s advisory partner, can tell you when and where to invest in existing mutual fund schemes. 

This will take the bulk of your research off your plate to ensure that you only invest in the best mutual fund schemes. Download the Cube Wealth app to know more.

Watch this video to know more about Wealth First, Cube’s mutual fund advisor

Other Risks Of Investing In An NFO

1. High Investment Cost

Funds with a smaller AUM can charge a bigger expense ratio will funds with a higher AUM cannot. If you invest in an NFO and the fund ends up raising only a fraction of the expected AUM, you may have to pay a high expense ratio when exiting the fund.

2. NFO Timing

People may unknowingly assume that if a fund or stock is being launched, the timing of the launch must be right because they must have evaluated the market conditions to get the best out of it. 

Truth is, this may not always be true. It may so happen that the NFO is launched at the wrong time or the period that follows the NFO may not be the best time to invest in the mutual fund scheme. 

Thus, you must Consult A Cube Wealth Coach to understand if you should invest in an NFO or existing mutual funds recommended by trusted experts, Wealth First, on the Cube Wealth app.   

Factors To Keep In Mind Before Investing In An NFO 

1. Fund House 

When a fund is newly launched, the Fund House will stake the success of the fund on its reputation. Thus, you must evaluate whether or not the fund house has a proven track record. You can look at:

• Returns generated by existing mutual funds
• Long term performance of fund managers
• Volatility and risk management
  

2. Investment Objective

A mutual fund launched via an NFO has fund objectives just like any other mutual fund. The fund objectives will help you understand: 

• Where the new mutual fund plans to invest
• The risks it is willing to take
• Liquidity
• Lock-in (if any)
  

Thus, the NFO must have clear and transparent objectives but above all, it should be in line with your investment objectives. 

3. Potential Themes, Securities And Type 

You must closely examine the type of NFO on offer (Open-ended or Close-ended) and where the NFO plans to invest its capital. For example, a conservative investor may not benefit from an NFO that plans to allocate a bulk of its portfolio to high risk small cap stocks. 

Along the same lines, you must also figure out the theme of the fund to determine whether the sector/theme and the fund itself could be profitable in the future.   

How To Invest In An NFO?

You can invest in an NFO in two ways:

1. Through A Broker

An authorized broker can help you buy units of a mutual fund scheme during a NFO. 

2. Through A Trading Account

You can invest in an NFO using a trading account online.

Alternatives Mutual Fund Investments

An NFO happens infrequently but there are other options that you can invest in. With the Cube Wealth app, you can invest in handpicked mutual funds at any time from the comforts of your home. 

The Cube Wealth app helps you invest in:

1. Overnight Funds

2. Liquid Funds

3. Banking & PSU debt Funds

4. Money Market Funds

5. Arbitrage Opportunities Funds

6. Large Cap Funds

7. Small Cap Funds

8. Mid Cap Funds

9. Multi Cap Funds

10. International & Global Mutual Funds

Download The Cube Wealth app to know more

Conclusion

A New Fund Offer has the potential to generate lucrative returns and is easy on the pocket. However, it can simultaneously burn a hole in your pocket if you do not evaluate the:

• Capabilities of the Fund House
• Investment objective
• Potential themes, securities and fund type 
  

The Cube Wealth app helps you invest in the best tried and tested mutual funds with advice from industry experts, Wealth First, who have a track record of beating the market by ~50%. 

Download the Cube Wealth app to invest in handpicked mutual funds today. 

FAQs

1. What is a new fund offering?

Ans. A New Fund Offer (NFO) happens when a Fund House launches a new mutual fund. The NFO helps the Fund House raise capital for the mutual fund from public investors. An NFO lasts for a fixed period of time and is available for a fixed price. 

2. What are the benefits of NFO?

Ans.  The benefits of NFO include:

• Low entry price (Generally ₹10)
• Innovative scheme options
• Professionally managed