New Fund Offer (NFO) refers to the new mutual fund schemes being offered to the investors. This is akin to Initial Public Offering (IPO) made by the unlisted companies for their equity shares, wherein the companies offer shares to the public for the first time. NFOs aim to attract household savings by offering new mutual fund schemes to the investors.
With new options before them, the investors may be more inclined to invest in mutual funds. One may be indifferent towards investing in regular mutual fund schemes and NFOs if schemes carry similar investment objectives. However, NFOs aim to capitalise on the trending topics, which may also be sustainable over the long term.
How does New Fund Offer (NFO) work?
Mutual funds houses collect money from the investors towards NFO, which is kept open for subscription for a fixed period. As primary units are created through the collections without any underlying portfolio, the units in an NFO are allotted at face value. The allotment will be for amount other than face value in case of index funds and ETf’s.
Once the subscription period ends, and units are allotted, the mutual fund scheme may open for investment in case of open-ended funds. The Net Asset Value (NAV) of the NFO will change daily and is caluated as the total assets minus total liabilities and then dividing the net value by the total outstanding units. The investors may redeem such units through mutual fund houses at the prevailing NAV.
In contrast, close-ended funds maynot be liquidated before the scheme maturity, but the investors are free to trade their investments on stock exchanges in such cases. However, demand for such units may be a challenge for the investors looking to liquidate such units.
Why invest in an NFO?
Investors may aim to reap the following benefits by investing in NFOs:
New Investing Themes
NFOs enable investors to invest in attractive and trending themes. NFO allows mutual funds to offer new mutual fund schemes to the investors. However, NFOs are meant not only for new sectoral/ thematic funds but also for other mutual fund categories.
Investors may be attracted to invest in NFO considering any trending theme to generate returns over the long term. While some mutual fund houses may already offer similar schemes, an investor may be inclined to invest in NFO instead of existing mutual fund schemes.
Investing in Fixed Maturity Plans
These are debt mutual fund schemes that carry a fixed maturity period. These schemes may be compared to traditional fixed deposits. However, FMPs tend to provide an edge through tax efficiency. Investments in FMPs and redemption at maturity date will result in LTCG (Long-Term Capital Gains), if the maturity of FMP is more than three years, which are taxed at a special rate of 20%. STCG (Short-Term Capital Gain) is applied as per income tax slab where he tenure of the FMP is less than 3 years. Thus, the taxation in an FMP depends upon on the tenure of FMP.
The indexation benefit allowed in the calculation of LTCG effectively lowers the tax applicable to the investors. Such schemes tend to invest in the debt securities carrying similar tenor, making it easier for the investors to project the estimated returns from the investment. FMPs may only be offered by mutual funds through NFOs, as an investment in such schemes may only be made within a specified time window.
Investing in Close Ended Schemes
Apart from FMPs, mutual funds may launch other close-ended schemes as well through NFO. Such schemes are not available for investment outside the specified NFO window, and thus, the investors may only invest through NFO.
Close-ended funds provide flexibility to the fund managers to invest for a relatively extended investment horizon, as they do not need to worry about the fund outflows and redemption pressures. The investors may also match the fund tenor with their specific goals maturing near to the fund maturity date to align their investments with financial plans.
With the above benefits, it does not make sense to ignore NFOs completely, and instead, one should strive to make an informed decision about investing in upcoming NFOs or otherwise.
Things to remember before investing in an NFO
Now that you understand NFO meaning, here’s what you should keep in mind before investing in one.
Background Check
Before investing in any NFO, it is recommended to check the history of the AMC and the experience of the fund manager managing that fund. This will help one get a better idea about the NFO.
Objective & Risk Check
One should check the objective of the scheme and its risk level before investing; to ensure it’s in line with one’s own goals and risk potential. A riskometer indicates the risk from 6 levels – low, low to moderate, moderate, moderately high, high and very high.
Disclaimer:
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.