How to Invest in NFOs: A Step-by-Step Guide for Smart Investors

This guide provides detailed steps for how to invest in NFOs.
How to Invest in NFOs
4 mins
09 Feb 2024

Investing in NFOs is a straightforward process. During the NFO period, you can subscribe to the fund by filling out an application form provided by the mutual fund house. This form includes essential details like your personal information, investment amount, and payment mode. You can apply through both offline channels, visiting the fund house or its authorised centres, and online platforms.

This article is here to help you understand the beginning of investing through something called New Fund Offers, or NFOs. NFOs are like the birth of a mutual fund scheme, giving you the chance to join in from the start. In simple terms, we'll explain what NFOs are, the different kinds, and how you can invest in them. Whether you prefer investing offline or online, we've got you covered. We'll also share important things you should know before jumping in and the benefits you might gain. This guide is your friend in navigating the world of NFOs, making investing easy to understand.

Understanding the Concept of New Fund Offer (NFO)

When an Asset Management Company (AMC) introduces a fresh mutual fund scheme, it initiates a New Fund Offer (NFO). Essentially, an NFO is the debut of a mutual fund, It's like being part of the initial chapter of a story. During an NFO, the AMC gathers the necessary funds to invest in stocks or debt instruments. Investors have a window of ten to fifteen days to subscribe to units at a fixed NAV of Rs. 10 per unit. It is important to note that the NAV of NFOs usually starts with Rs. 10, however the same may not apply for liquid schemes.

Types of New Fund Offers (NFOs)

Now that you grasp what a New Fund Offer (NFO) entails, let's understand the types of NFOs in mutual funds.

  1. Open-ended: This type of mutual fund offers flexibility for entry or exit at any time. You can invest during the NFO period, after it ends as a lump sum, or through a Systematic Investment Plan (SIP). However, some equity and debt funds may impose an exit load on withdrawals made before a specified period.
  2. Close-ended: As the name suggests, a close-ended mutual fund doesn't allow premature withdrawals. Closed ended mutual funds are listed on stock exchange where they can be redeemed if there is a buyer in the secondary market.

Let's illustrate open-ended and close-ended NFOs with an example:

Imagine an Asset Management Company is launching a one-year closed-ended Fund NFO named “A” with an NAV of Rs. 100 per unit. If an investor, “R”, buys 10 units during the debut and later sells them, they could earn a profit. Open-ended funds, which allow redemption at any time, contrast with close-ended funds.

Another NFO type is interval funds, a hybrid of closed-ended and open-ended funds, offering acquisition and redemption at set intervals through the AMC portal, like yearly or semi-annually.

How to Invest in NFO?

Investing in a New Fund Offering can be done through both offline and online modes, but a crucial step before investing is ensuring completion of your KYC (Know Your Customer) process. This verification is essential, as an NFO application from a KYC non-compliant investor may be rejected. Let's explore the two modes separately:
Investing in NFOs – Offline Mode: In the offline mode, you fill out a physical form and sign it with your folio number (if your are an existing investor with the fund house) and other details, following KYC verification. In case you are not an existing investor of the fund house you will have to submit a fresh application for the NFO and post unit allocation, folio number will be allotted.

  1. Offline investments in NFOs are usually facilitated through brokers or directly at the Asset Management Company (AMC) office, where the AMC guides you through the process.
  2. If using an authorised broker, submit the form, cheque, and other details to the broker. Brokers often double as financial advisors, assisting with fund selection and SIP structuring.
  3. Existing folio holders with the AMC can utilise their folio number, streamlining the application process.
  4. Complete the offline form, verify details, sign, and submit it to the broker along with the NFO payment cheque.

Investing in NFOs – Online Mode: In the online mode, you fill out the NFO application on the internet, checking your KYC status before proceeding with the investment. This can be done through the platforms like the Bajaj Finserv Mutual Funds platform.

  1. Log in or register to your platform using your unique credentials.
  2. Browse available NFOs on the website or through your online broker, who typically provides all NFO investment details.
  3. Select the preferred fund, determine the investment amount based on your allocation plan, and use online resources for guidance.
  4. Enter the investment amount and specify whether it's a lump sum or SIP investment.

Things to Know Before Applying in an NFO

New Fund Offers (NFOs) in mutual funds differ significantly from equity Initial Public Offerings (IPOs), and it's crucial to grasp these distinctions. Unlike an equity market IPO, where funds can be raised through fresh issuances or offer-for-sale (OFS), an NFO is solely for fresh fund-raising without any predetermined limits. Additionally, while IPOs have specific quotas for retail investors, High Net Worth Individuals (HNIs), and institutions, mutual fund NFOs lack such specialised allocations. Moreover, the price discovery mechanism, driven by demand and supply forces, determines equity IPO prices, whereas NFO prices are fixed at Rs. 10 in all cases, regardless of demand.

It's imperative to recognise that NFOs come with associated costs. Launching an NFO entails significant expenses in marketing, publicity, distribution, advertising, and various promotional activities. Brokers and distributors often demand upfront commission and trail fees, contributing to the relatively high initial costs of an NFO. Although these costs are debited to the Net Asset Value (NAV), many NFOs commence routine transactions at deep discounts.

Conclusion

Navigating the world of NFOs involves understanding market dynamics, assessing personal financial goals, and making informed decisions. By grasping the intricacies of NFO investments, investors can embark on a journey that aligns with their objectives and risk tolerance, potentially reaping rewards in the long run.