You must have seen that these days mutual funds are bringing many new NFO (New Fund Offer). Mutual funds are launching new NFOs to capitalize on this opportunity.
What is NFO, how many types of NFO are there, what are the pros and cons of NFO, you will know in this article.
What is NFO (New Fund Offer)
The full form of NFO is New Fund Offer. A new fund initiated by any mutual fund is offered for a first-time subscription.
In that mutual funds offer the unit of their new fund to the general public for the initial sale. Like IPO, mutual funds launch NFO to raise capital.
And attract new investors. Not only this, like the IPO, the NFO has a subscription price, which is generally Rs 10 per unit.
As the minimum investment in IPO is approx 15000 rupees, similarly the minimum investment in NFO is up to 5000 rupees.
Types of NFO
There are 2 types of NFO:
- Closed-ended Funds
- Open-ended Funds
Closed-ended Funds
In Closed-ended funds, a fixed amount is raised from investors through NFO. After the end of the subscription period, no investment can be added to it.
These funds have a fixed maturity period of 3 to 5 years and investors cannot withdraw their funds from this fund scheme before maturity.
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These funds are tradable but the liquidity in these funds is very less.
Open-ended Funds
Open-ended funds are more flexible and there is no maturity period in these funds. Investment can be made in these anytime. Investors can withdraw these funds anytime and there is a lot of liquidity to trade as well.
Most of the NFOs fall in the open-ended funds category only.
Function and process of NFO
NFOs are similar to IPOs and have a lot of similarities. The subscription period of IPO is fixed for 3 days while the subscription period of NFO is 10 to 15 days.
The price band of IPO is fixed towards the estimated value of the company share while the subscription price of NFO is generally rupees 10.
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All the information of IPO is in its DRHP and RHP whereas all the information of an NFO is in its SID (Scheme Information Document) which mutual funds provide.
Difference between NFO and IPO
Concept of NFO
NFO and IPO are similar but different in some ways. The company that brings IPO in the market has a record of its performance for the last few years and considering its future prospects, its current valuation is available to investors in a detailed manner.
The same NFO does not have any past track record. Only investors have information about a concept and strategy.
Every NFO has a minimum target set as to how much investment investors have to raise.
After raising the targeted fund, the mutual fund allots the investors according to rupees 10 per unit and starts investing the raised fund.
Sometimes if the fund does not match with the raised target and remains low, then the mutual fund withdraws its NFO and returns its subscription amount to the investors.
In IPO, where investors get listing gains on a listing day, while there is no instant gain on the listing of NFO.
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As the market value of the fund manager’s investment increases, so does the value of the fund.
As the regulation of mutual funds is more than that of stock, so provide all the information related to NFO in the information document of your new NFO which is important for investors to know.
1. Riskometer
This meter reflects the overall risk associated with NFO. The level of Riskometer depends on the asset being added to the fund. If the fund has more risk investment in equity then the meter will reflect high risk.
In the case of the Habit fund and risk fixed income fund, the risk is moderate.
In the case of assets like Liquid funds and Gold funds, the risk remains low.
2. Minimum and maximum limit of fund allocation in different asset classes
Before introducing any new scheme to the public, mutual funds decide that the total investment raised from NFO will be allocated in which asset.
Funds cannot break these limits and invest accordingly.
For Example, The minimum fund allocation limit in Axis value fund equities is 80% and the maximum limit is 100%. The maximum allocation limit in the same debt and REITs is 20% and 10%.
3. Assets not to invest
There are also some assets in which fund managers avoid investing such as derivatives and debt for equity funds. Investing in these assets can affect the mandate limits of the fund.
4. Expense Ratio
It is necessary for the mutual fund industry to disclose TER (Total Expense Ratio). It is also important for investors to know how much expense ratio is expected from the mutual fund to manage the fund.
And because of its expense ratio, what will be the effect on the value of the fund. Apart from this, exit load and benchmark index for performance calculation.
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Investors should know which benchmark index they have to compare the performance of their fund.
Pros and Cons of Investing in NFO
Pros of Investing in NFO
Retail investors have their limitations, it is difficult for them to execute certain strategies or to capitalize on international investments.
But investing in NFO reduces all these limitations.
Usually, NFO involves such products which are either on a new investment strategy or invest by innovating an old strategy, with the help of which the investment of retail investors can be executed on that sub-strategy.
A recent example of this is Baroda Business Cycle Fund, in which the investment strategy is based on the growing business cycle.
There are many such NFOs who invest the funds of retail investors in international assets and theme base baskets of stock such as ESG.
Cons of Investing in NFO
The new NFO brings with it a new investment strategy to apply in the market and the unavailability of the past performance of that strategy is always at a disadvantage to the investors.
More retail investors participate in this market only when the market is in a bull trend.
Like IPO, NFO is also introduced at the same time. And units are allotted to retail investors at a higher price.
Investors should always remember that investing is a dynamic world and the past performance of an asset does not guarantee its future performance.
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Mutual funds always give a disclaimer Mutual funds and investments are subject to market risk and this disclaimer is also applicable to every NFO.
The full form of NFO is New Fund Offer. A new fund initiated by any mutual fund is offered for a first-time subscription. In that mutual funds offer the unit of their new fund to the general public for the initial sale. Like IPO, mutual funds launch NFO to raise capital.
There are 2 types of NFO:
1. Closed-ended Funds
2. Open-ended Funds
In Closed-ended funds, a fixed amount is raised from investors through NFO. After the end of the subscription period, no investment can be added to it. These funds have a fixed maturity period of 3 to 5 years and investors cannot withdraw their funds from this fund scheme before maturity.
Open-ended funds are more flexible and there is no maturity period in these funds. Investment can be made in these anytime. Investors can withdraw these funds anytime and there is a lot of liquidity to trade as well.