NFO: Is it suitable for you?

What is NFO?

When an Asset Management Company comes with a new fund, the first subscription offered then is called New Fund Offer. This helps the AMC to raise capital for purchasing securities. The subscription for the general public is on a first-come-first-serve basis. The NFO is open for subscription only for a limited time period. Upon listing, the fund can be purchased just like any other fund in the market. Usually, NFO subscribers have found to experience significant listing gains.

Types of NFOs

NFOs can be open-ended or closed-ended. ETFs are also offered for the first time through NFO.

  • Open-End Fund: Once the NFO ends, an investor can buy and sell the units of the fund anytime.
  • Close-End Fund: In this type of NFO, investors cannot enter or exit after the NFO period until maturity. The maturity is disclosed during the NFO; it is usually around 3-4 years.

Things to Consider before investing in NFO

  • Fund House Reputation: A due diligence of the fund house offering the NFO is a must. The fund house must be in the industry for at least 7-10 years. This will help in analyzing the performance of the fund house during market ups and downs. A good track record might give promising returns from the NFO.
  • Fund Objectives: It is very important to understand the fund objectives. Some of which is asset allocation, expected returns, riskiness, liquidity, etc. By reading the offer documents as an investor you need to get clarity on how your money is going to be put to use.
  • The theme of New Fund Offer: With more than 12,000 funds available in the market, you need to understand what is the unique thing that this NFO is offering. For this, read the documents carefully. The theme should be such that the fund is offering something new and can be sustained in the market. If you come across no such unique strategy in the fund, then it is a signal for you to stay away. 
  • Returns: It’s always wise to invest with some return expectation. Else, the investment gets compromised. Similarly, for an NFO, try to gauge the returns from the documents given. If you have invested in an NFO, then make sure for the first three years you are tracking the quarterly performance of the fund and compare it to its peers and index.
  • Risk factor: NFOs are risky. Unlike for existing funds, you do not have returns or asset allocation readily available. It’s advised to look at the fund managers experience and expertise in such cases.
  • Cost of investment: One of the factors that determine the potential returns is the overall cost involved. Though NFO does not have an entry load, some may have exit loads. If the tenure of the NFO and your investment horizon are not the same, then you might incur the exit load expense. Also, check for an expense ratio of the fund in case it is too high, it’s better to go ahead with existing funds with lower expense ratio.
  • Minimum Subscription Amount: Usually, NFOs have a minimum subscription amount. It may range between Rs 500 – Rs 5,000. For most investors, this would be one of the main criteria for shortlisting. If you feel the amount is higher, then it is wise to invest through SIPs in an existing top performing fund.
  • Investment Horizon: In case of close-ended NFOs, the lock-in period may be around 3-5 years. If your investment horizon is not the same as the tenure of the fund, then stay away. Entering in an NFO with a lock0in and exiting before its tenure can cost you high.

Should You Invest in NFO?

If you have the expertise and the understanding of the markets, then you can invest in NFOs. If the knowledge you possess helps you in understand the investment objective of the NFO and you are able to foresee good returns, you are good to go.

Reasons for not Investing in NFO

  • No proven track record
  • High Risk
  • High initial expenses
  • Not cheaper compared to other funds
  • Endless supply of mutual fund units

Therefore, NFOs are only for people with a high-risk tolerance. If you wish to invest in an NFO, make sure you conduct proper due diligence of the fund house, fund manager and the objective of the fund. However, it is always advised to go ahead with a known devil rather than an unknown angel. NFOs can be dicey, it’s a gamble. Do it only if you have the appetite for it.

To invest in existing top mutual funds with Upwardly.

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