When an AMC launches a new mutual fund scheme, it is referred to as a New Fund Offer (NFO). It operates on a first-come-first-serve basis for the general public to subscribe.
NFO is the opening period in a mutual fund scheme. An NFO duration may be from a few days to a few weeks. Purchasing units in your Best Mutual Fund during this period will let you buy units at the NFO price (usually Rs 10 or Rs 100). You will also be invested in the mutual fund from its day one.
An open-ended fund will officially get launched after the NFO ends. You can enter the fund and exit from it at any time after the launch.
On the other hand, a close-ended fund will not allow entry and exit of investors once the NFO period, is over. Till the units get mature. Generally, this is 3-4 years from the launch date. You can buy and redeem units of such a fund on the stock market in theory. But liquidity in such Mutual Funds Investment on the market tends to be low.
Working of NFO
In an NFO, the opportunity to subscribe to the best Mutual Fund Plan is available only for a limited period. In this time, you may purchase units of the mutual funds to subscribe to the NFO at its offer price. This is typically fixed at Rs 10. Once this duration expires, you would be able to purchase the units of the fund at the prevalent prices at that time. Usually, NFO subscribers have found to experience major gains after listing.
Benefits of Investing in NFOs
The AMC raises money from the public, with the help of an NFO. With this amount, they purchase securities like equity shares, bonds, etc. from the market.
NFO is cheaper than the existing funds because it is just introduced in the market. Though that is not the only advantage of investing in NFO. Below are a few more that you may regard useful about NFOs.
(a) Lock-in Duration
If you are looking to stay invested in Mutual Funds for not more than 2-3 years, it would adversely affect your returns. Still, most investors in Best Equity Mutual Funds redeem within that period. This is simply because it is difficult for investors to stay calm during market fluctuations.
However, the lock-in provided by close-ended funds of 3-4 years prevents investors from falling prey to such bad investing behaviors.
(b) Flexibility
Close-ended funds have flexibility in terms of the right time to invest. In other words, even if the fund has been launched at a market peak and the investment timing is bad. But the fund manager can hold on to your funds and invest a part of it a little later. This flexibility and dynamic decision making helps fund managers to outperform.
(c) New Strategies
Close-ended funds offer you the chance to invest in new and innovative strategies. Such uniqueness that existing open-ended funds may not have. To give you an example, the Edelweiss Maiden Opportunities Fund, launched in February 2018 was dedicated to investing in pre-IPO and recently listed companies. The DSP Blackrock ACE Fund Series 2 from the house of DSP Blackrock Mutual Funds, and the Kotak India Growth Fund Series 4, from the house of Kotak Mutual Funds, were both launched with innovative hedging strategies. These protected the investments from downslide. And because these were close-ended, you could have only invested in these types of mutual funds in the NFO period.
(d) Freedom from large flows
Open-ended funds are exposed to large inflows and outflows. A sudden outflow can force the fund manager to sell his stocks at rock-bottom prices, causing a loss to all the investors in the fund.
On the other hand, unitholders of a close-ended fund are locked-in for the complete duration of the fund. This way the fund manager can focus on stock selection and monitoring. You can only invest in a close-ended fund through an NFO.
(e) Risks
NFOs are launched for new funds that have no established track record. This brings a level of uncertainty.
In the case of open-ended Mutual Funds, some Mutual Fund Advisors argue that you can enter them after the fund is launched as well. But this reduces the advantages of investing at the NFO stage.
NFO vs IPO
They may sound the same as IPOs. But the IPO enables the public to purchase shares before they get listed on the exchange. Moreover, quite a lot of marketing efforts go into their promotion. To attract and convince the public that it is a once in a lifetime opportunity. However, most of the times you must use your judgment and wisdom before settling for one.
An IPO or Initial Public Offering is the sale of a company’s shares before its listing on the stock market. On the other hand, an NFO is an offer of a mutual fund’s units.
In an IPO, the shares may be priced above or below its real value, as dictated by fundamentals. The NFO price of a fund cannot be described in the same way.
The pricing of a mutual fund is simply dictated by the market value of the units it holds (NAV). This is true during the NFO period and after the fund has started. So you do not have to worry about significant price fluctuations in IPO.
Moreover getting allotment in an NFO is not as difficult as an IPO. You would certainly get the units you apply and pay for, in the NFO.
Should you Invest in NFO?
Since you’ll be buying a fund’s performance, you need to judge its ability to perform. That validation of a fund’s strategy comes about only after it has been through a market cycle or two. This way you have the information to see how it sails in the ups and downs of the markets and how successful it is in picking stocks. This is not possible in an NFO because it won’t have any track record. This makes NFO a risky investment vehicle.
The risks you take in an NFO are much higher than when you invest in a fund that has already been around for a few years. Even if both funds have similar features. Whether market cap orientation, duration or similar credit risk.
Moreover, the risks are much higher when it’s a close-ended NFO as it does not give you the flexibility of an exit should the performance falter.
So you must keep below points in mind before investing in NFOs.
(a) Fund House Past Record
If you want to invest in an NFO, then a background check on the AMC is a must. it gets important to ensure that the fund house has been in the Mutual Funds industry for quite some time, say at least 8-10 years. This way you will be able to analyze its past performance. And how it delivered during market ups and downs. If the AMC has had a good track record, then the NFO might execute the mandate.
(b) Fund Objectives
The fund objectives spell out how and where it will allocate its money. The new scheme will explain how it plans to allocate the asset, riskiness, expected returns and liquidity among other things. This will help you develop an understanding of the viability of the NFO. An NFO needs to detail its investment process which it’s going to carry out for the given investment horizon.
In other words, when you go through the offer document, you should be able to understand what the fund manager is going to do with your money. If the objectives of the Mutual Fund plan is not clear to you, then it shows weaknesses in the investment process.
(c) The Theme of the NFO
There are over 8000 mutual fund schemes in the Indian mutual fund industry. So if you come across an NFO, you need to read the fine print carefully to understand the fund theme.
Make sure that the fund house is offering something unique. The investment theme should be sustainable. Most importantly, it should offer something unique, something that has not been offered by the existing schemes. Whereas if you find that it only repeats the existing strategies, then it is probably not a viable proposition.
(d) Returns
If you are looking for investing in an NFO, then it would be wiser to consider the returns criteria. The offer document may or may not touch upon this information. But you need to set an expected rate of return in mind and examine the fund accordingly. In case you have already invested your money in it, then go for a quarterly review for at least the first 3 years. You may compare the mutual fund performance with its Index and Peer funds to understand the returns performance.
(e) Risk Element
Investing in NFOs involves a certain risk. In the case of existing funds, you can readily check the asset allocation and risks involved, However, the NFOs don’t have a performance history. And, you won’t be able to assess how your money will be utilized by the fund manager. Without the availability of any benchmark or metrics, it will be difficult for you to foretell how it is going to perform. Whether the fund will emerge as a winner or a loser remains a mystery.
(f) Timing of the launch
An AMC would usually launch an NFO to complete its product basket, or if there is a demand for a particular investment theme. AMCs tend to launch newer funds and come out with ideas when that theme is a great idea in the market. Often, the funds are launched when their theme is at its peak. If you invest at such a time, it may not get you a good return. Try to determine the investment reason for the theme and if it can hold sway over time. When investing in sectoral or thematic funds, you must be mindful of the timing. NFOs of mid- and small-cap funds may earn varying results depending on the entry point.
(g) Costs
During the NFO phase, the investor only has a rough idea about the maximum charges that will get levied. Even if there is no Exit Load charged. The actual total expense ratio is disclosed only later. Newer funds may also charge a higher expense ratio, initially because their corpus is very small. As its NAV base expands, the costs start getting lower. So you must keep in mind the higher cost burden.
(h) Minimum Subscription Amount
Generally, the NFOs have a minimum subscription amount for the investors. It may range anywhere from Rs 500 to even Rs 5000. As an investor, you can make this criterion as one of your main shortlisting points. If the minimum subscription amount is higher than what you can spare, then you can re-evaluate your decision. You may instead invest in a Systematic Investment Plan (SIP), in an existing high-performing scheme, which is an affordable and convenient choice.
(i) Investment Horizon
Some NFOs may have with a lock-in period. In that situation, you might have to keep invested for the entire duration. Is that in line with your investment horizon and objectives? After investing, you would not be able to redeem units before maturity. Else, you might have to pay a huge pre-exit fee (exit load) for this. So, if this duration in an NFO happens to be longer than your investment horizon, it’s better to avoid such investments.
There are several benefits of investing in NFOs. But you have to be very careful too.
If you are still not sure about how to invest in NFOs and receive the benefits of buying Mutual fund Units at a low price, stop thinking and Call + 91 9999379929 NOW!! Or mail your queries at contact@wealthbucket.in.
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