There are various options through which you can invest your money. You can invest in the shares of companies either by buying their shares through stock market or participating in the IPO of the companies. Those who do not have enough knowledge of share market but want to have exposure equity market, may invest in mutual funds of various fund houses or asset management companies. Like initial fund offer (IPO), there is another investment avenue called ‘New Fund Offer (NFO)’, which is the offering made by the mutual fund houses or an asset management company. In this post, we will learn about the NFO and how to invest in them.
What is NFO?
Full form of NFO is ‘New Fund Offer’. When a mutual fund house or asset management company offers units of its new scheme for the first time, it is called ‘New Fund Offer (NFO)’. Just like the IPOs, where the companies offer their shares first time to the investors, the mutual fund companies offer the units of their schemes first time in the form of NFOs. Similar to IPOs, the NFOs are launched in the market to raise capital.
How NFOs work?
When the launching of an NFO is announced, the investors have an opportunity of purchase its units at the face value of Rs. 10/- per unit. This scheme is available for a limited period of say 15 days or one month. After that period, the investors may buy the units at the prevailing NAV. NAV or the ‘Net Asset Value’ is the unit price of a mutual fund scheme. Like the number of shares of a company, the investors can purchase number of units of a mutual fund scheme either at the face value or at the prevailing NAV. As the companies incorporated in the mutual fund scheme perform better, the price of NAVs goes up and the investors may gain profit form their investments.
Type of NFOs
There are mainly three types of NFOs, which are described below:
Open End Fund
In this type of fund, the number of units of the scheme are available for investment or redemption at any point of time. Even after the NFO is closed, the investors can buy or sell the units of the scheme at the prevailing NAV and subject to exit load.
Closed Ended Fund
The purpose of these schemes is to collect a pool of money for investment in securities and after the collection of required amount, the schemes are closed. It means that the entry and exit in this scheme is restricted till the maturity period is over. However, after NFO is closed, these schemes are listed in the stock exchanges by the asset management companies, and if you want to exit from the scheme, you can trade these units on the exchange.
Things to Keep in Mind Before Entering into and NFO
- The NFOs do not have a proven track record and past data about NFOs is not available, therefore investing in NFOs may be risky. On the other hand, the NFOs provide an opportunity to enter into a new asset class and if the fund performs well then the investors may reap the benefits.
- NFOs collect fund before the actual scheme goes live in the market. The specific stocks the fund will be investing in, may not be very clear at the beginning, so the investor has to wait for the details about the schemes’ investment portfolio.
What to Consider Before Buying Units in an NFO
Theme of the NFO
Every investor has an investment strategy and he may or may not like investing in a particular sector. Therefore, if the theme or investment strategy suits you, then only you should consider investing in a particular NFO.
Investment Horizon
You should check the investment horizon of the NFO and the time period up to which, you can hold the money. If you are comfortable with the investment horizon, then only you may consider investing in that fund.
Exit Options
Examining the exit options is very important before taking any investment decision in the NFOs. Some NFOs specify a minimum lock in period and if you want to exit before that period, you may have to pay a substantial percentage of the investment in the form of exit load or you can say penalty. In the open ended schemes, you have the option to exit at any time, but in the closed ended schemes, you cannot exit before the maturity period. However, since these schemes are listed in the stock exchanges, hence, if you want to exit before maturity, you may trade these units on the exchange.
Risk Appetite
Every investor has their own risk appetite. Some investors can afford to take higher risks while the others may choose to invest safely. Therefore, you should check the asset classes, the NFO is investing in. If the risk in that asset class is in line with your own risk appetite, then you may go ahead.
Is Investing in NFOs, a Right Choice?
NFO provides you an opportunity to enter in a new asset class with relatively cheaper rates. With the help of NFOs, the fund house raises money from the public to buy the securities such as equity shares, bonds, etc. NFO is cheaper as compared to the existing funds because they are new to the market. They are similar to the ‘Initial Public Offerings (IPOs)’, in which public can purchase shares of a company before getting listed in the stock market. However, you should make your own due diligence before investing in the NFOs.
Conclusion
NFOs stand for ‘New Fund Offer’. Like the IPOs, where the companies raise money for their growth by selling their shares, various fund houses raise money with the help of NFOs to buy the securities like equity share, bonds etc. NFOs provide a good opportunity to invest in a new asset class at a relatively cheaper rates. They are cheaper as compared to other funds because they are new to the market. However, investing in NFOs is risky also because they do not have a proven track record and the data for analysis of the NFOs is not available. Therefore, the investors should make their own analysis by taking into consideration crucial points as discussed in this article.
Also read: Is Investing in an IPO a Right Choice?
