How to invest in NFO

Investing in New Fund Offers (NFOs) can be risky due to their lack of track record, unclear differentiation, and timing issues. It is advisable to wait and observe the fund's performance over time before committing your investment.
How to invest in NFO
4 mins
13-June-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.

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:

How to invest in NFO offlinevisors, assisting withvisors, assisting with 

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.

How to invest in NFO online

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.

Benefits of investing in NFO

Fresh investment avenue

NFOs present a novel mutual fund scheme, offering investors an opportunity to engage from its inception. This allure appeals to individuals seeking to commence afresh and be part of the fund's journey from its nascent stage.

Accessible initial investment

NFO units are typically available at a predetermined price, commonly pegged at Rs 10 per unit. This affordability renders NFOs attainable for investors with limited financial resources, enabling them to initiate investment with a modest sum.

Innovative investment themes

Certain NFOs introduce inventive or specialized investment themes or strategies to the market, enabling investors to diversify their portfolios in a distinctive manner.

Potential for Future Growth

Provided effective management and alignment of investment strategies with financial objectives, investors stand to benefit from the fund's performance as it matures over time.

Expert fund management

NFOs are overseen by seasoned fund managers who base investment decisions on the fund's objectives and prevailing market dynamics, potentially bolstering the likelihood of realizing investment targets.

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.

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.

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.

Also read - Know difference between open ended and close ended funds

Key guidelines for New Fund Offerings (NFOs) investment by SEBI

Securities and Exchange Board of India (SEBI) imposes specific regulations concerning the accumulation of funds during the NFO phase:

  • Debt-oriented and balanced hybrid schemes must garner a minimum subscription amount of Rs. 20 crore during the NFO period, while other schemes require a minimum of Rs. 10 crore.
  • The mutual fund company launching a new scheme must ensure that funds collected during NFO originate from a minimum of 20 investors.
  • To prevent concentration of investment among a few individuals, no single investor can hold more than 25% of the scheme's corpus, adhering to the 20-25 rule, a standard in the mutual fund industry.
  • Furthermore, the fund house initiating a new fund is required to invest in the scheme, previously mandated at a minimum of 1% of the NFO amount or Rs. 50 lakh, whichever is lower. SEBI has recently revised these guidelines, urging fund houses to increase their stake based on the scheme's risk level. However, the practical implementation of these new norms by SEBI remains pending clarification.

Things to keep in mind before investing in NFO funds

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.
 

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Frequently asked questions

Can we invest directly in NFO?

Yes, you can directly invest in an NFO during its subscription period. This typically involves approaching your investment advisor or using the online platform of your chosen mutual fund house.

How to invest in NFO directly?

To invest directly in an NFO, you will need a KYC (Know Your Customer) compliant Demat or mutual fund account and investing platform access. You can then choose the NFO, specify your investment amount, and complete the online application or invest through your advisor.

Is it safe to invest in NFO?

Investing in NFOs carries similar risks as investing in established mutual funds, with factors like market volatility and fund management effectiveness influencing returns. While NFOs offer the advantage of entry at the fund's inception, investors should conduct thorough research on the fund's objectives, management, and market conditions before investing to mitigate risks.

Which NFO is best to invest now?

Unfortunately, there's no single "best" NFO. The best choice depends on your investment goals, risk tolerance, and existing portfolio. Research and compare NFOs based on your financial situation.

What is the process of NFO?

The NFO process involves the fund house announcing the launch, outlining its investment strategy, and setting a subscription period. Investors can then apply during this window to purchase units at the initial offer price.

Which is better, NFO or SIP?

NFOs offer the chance to invest in a new fund at the ground floor, while SIPs (Systematic Investment Plans) allow for disciplined, regular investment. Consider your goals - for a lump sum investment, an NFO might be suitable, while SIPs are better for long-term, rupee-cost averaging.

When should I invest in NFO?

Invest in an NFO if it aligns with your investment goals and you believe in the fund's long-term potential. However, thorough research is crucial before investing in any NFO, not just because it's new.

How is the NFO price calculated?

The NFO price is typically set at a fixed price per unit (often Rs. 10) during the subscription period. This price may be adjusted based on the total amount of money collected from investors. There's no complex calculation involved for investors; the price is pre-determined by the fund house.

Can we withdraw money from NFO?

Unlike established mutual funds, investors generally cannot withdraw money from NFOs until the fund transitions from the NFO phase to a regular open-ended scheme. During the NFO period, investors can only subscribe to the fund by purchasing units at the offering price.

When can I sell my NFO?

After the NFO period ends and the fund transitions into a regular open-ended scheme, investors can sell their NFO units in the secondary market through exchanges or redemption with the mutual fund company. The exact timing for selling NFO units depends on the fund's structure and market conditions.

What is the minimum amount for NFO?

The minimum investment amount for NFOs varies depending on the mutual fund scheme and regulatory requirements set by the Securities and Exchange Board of India (SEBI). Generally, NFOs may have minimum subscription amounts ranging from Rs. 500 to Rs. 5,000, but this can differ based on the fund's investment objectives and structure.

What is Rs. 10 NFO?

Rs. 10 NFO refers to New Fund Offerings (NFOs) where the initial offering price per unit is set at Rs. 10. This fixed price offering allows investors to subscribe to the fund at a predetermined rate per unit during the NFO period, often making it accessible to investors with varying budget sizes.

How to choose NFO?

When selecting NFOs, investors should consider factors such as the fund's investment objectives, asset allocation, fund manager's track record, expense ratio, and market conditions. Conducting thorough research, analyzing the fund's prospectus, and assessing one's investment goals and risk tolerance are crucial steps in choosing an NFO.

What is expiry in NFO?

In the context of NFOs, "expiry" typically refers to the end of the NFO period, after which investors can no longer subscribe to the fund at the initial offering price. Once the NFO period expires, the fund transitions into a regular open-ended scheme, and investors can buy and sell units at prevailing market prices.

Can NFO be profitable?

NFOs have the potential to be profitable if the fund's investment objectives align with market conditions and the fund manager's strategy generates positive returns. However, profitability depends on various factors such as market performance, fund management effectiveness, and investment duration. Thorough research and careful consideration of risks are essential for maximizing potential profitability in NFO investments.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.