The term “new fund offer” refers to new mutual fund schemes that are being offered to investors. This is similar to an unlisted company’s initial public offering (IPO), in which the company offers its equity shares to the public for the first time. By introducing new mutual fund plans to investors, NFOs want to attract family savings. Investors may be more motivated to invest in mutual funds now that they have more alternatives. If the financial objectives of normal mutual fund schemes and NFOs are identical, one may be uninterested in participating in both. NFOs, on the other hand, seek to profit from current events, which may or may not be sustainable in the long run.
Table of Contents
How Does New Fund Offer work?
The option to subscribe to a new fund offer is only accessible for a short time in a new fund offer. During the pre-defined period, investors can acquire units of the mutual fund scheme and subscribe to the NFO at an offer price. This is generally set at Rs 10 in most cases. Investors will be able to acquire fund units at the stated price after the tenure has expired. NFO subscribers, on average, have seen significantly higher profits after the listing.
How is an NFO different from an IPO?
The basic distinction between the two is that an IPO’s price is determined first by what the business deems to be fair value for its stock, and subsequently by market factors such as demand and supply. An initial public offering (IPO) goes through a price discovery procedure.
NFOs are generally priced at ₹ 10 only. However, it would have made little difference to an investor if it had been set at ₹ 1 or ₹ 100. At ₹ 1, investors would have received more units, but at Rs 100, they would have received fewer units. The fund’s price changes after it is listed based on the success of its portfolio and have nothing to do with supply and demand.
Why NFO is a good opportunity?
The fund house uses an NFO to raise money from the public in order to buy securities in the market, such as equity shares, bonds, and so on. Because it is new to the market, NFO is less expensive than current funds. They’re similar to Initial Public Offerings (IPOs), in which the general public can buy the stock before it’s listed on a stock market. Furthermore, the marketing efforts that go into its promotion make it a can’t-miss occasion. However, before choosing one, you may need to use your judgement and knowledge.
Who opts to invest in a New Fund Offer?
When the markets are at their highest, most investors look for mutual fund investing possibilities. They want to get into the market, whether it’s gold or real estate because they believe it will continue to grow. They do, however, favour profitable investments that are accessible at a lower cost. Asset management firms (AMCs) aim to take advantage of this investor mindset. This is why consumers are drawn to NFOs that appear to be less priced. Investors regard the NFOs to be a good investment and subscribe to them. As a result, the fund companies will be able to meet their objective of expanding their Asset Under Management (AUM).
Also Read: Are Mutual Funds Worth It in 2021
Things to consider as an investor
Fund House Reputation
If an investor wants to invest in an NFO, it is critical to conduct due diligence on the fund house. Check to see if the fund firm has a long track record in the mutual fund sector, at least 5 to 10 years. It will assist you in determining the fund house’s performance during market ups and downs. The NFO may perform as promised if the fund firm has a strong track record.
The asset allocation, riskiness, projected returns, and liquidity, among other things, are all spelt out in the fund goals. It aids in the formation of an opinion on the NFO’s feasibility. An NFO must clearly describe its investment methodology, which it will follow for the duration of the investment horizon. Simply put, reading the offer document should assist potential investors in understanding what the fund manager intends to do with their money. If investors can’t figure out what the NFO’s goals are, there are flaws in the investing process.
Theme of New Fund Offer
The Indian mutual fund industry has a plethora of mutual fund programmes. When you come across an NFO, it is recommended that you read the tiny print carefully to grasp the fund topic. The investing theme must be long-term and deliver something that present plans do not. However, if the new fund offer is simply a rehash of an existing approach, it is unlikely to be a viable alternative.
If you’re thinking about investing in an NFO, it’s a good idea to look into the historical performance. This information may or may not be mentioned in the offer agreement. You can calculate a predicted rate of return and compare it to the fund’s performance. If you’ve already put money into the fund, you might want to consider revisiting it quarterly for the first three years. To understand the return trend, you may compare the mutual fund’s performance to that of the index and peer funds.
Cost of investment
One of the factors that determine your prospective profits is the total cost of your investment. Although there is no admission fee, some NFOs levy exit fees if you redeem your units before the tenure is over. If the lock-in period is greater than your investment horizon, the exit loads may have an impact on your results. Another important factor is the expense ratio, which is the yearly fee imposed by the fund house for managing your money. Check to see if the expense ratio is less than or equal to what SEBI requires.
Minimum Subscription Amount
Investors are typically required to pay a minimum subscription amount when investing in NFOs. It might be anything from ₹ 500 to ₹ 5,000. As an investor, this might be your key criterion for narrowing down your investment options. If the minimum membership price is more than you can afford, reconsidering your alternatives is a good idea. In such circumstances, you may want to consider enrolling in a systematic investment plan (SIP) in an established high-performing scheme, which is a more cost-effective and convenient option.
NFOs are likewise subject to lock-in periods of three to five years. In such instances, you will be obliged to invest for the duration of the contract. Make sure your investments are appropriate for your investment horizon and objectives. You may not be able to redeem your units before they mature if you subscribe to a mutual fund scheme. You may also be charged a pre-exit fee (exit load) for the same in some circumstances. If your chosen NFO is longer than your investing horizon, it’s a good idea to reconsider your alternatives.
|ICICI Prudential NASDAQ 100 Index Fund|
|Mahindra Manulife Asia Pacific REITs FoF – Regular Plan|
|Axis AAA Bond Plus SDL ETF – 2026 Maturity FoF – Regular Plan|
|NJ Balanced Advantage Fund – Regular Plan|
Investing in non-financial organisations (NFOs) might be hazardous. NFOs, unlike existing funds, do not have a performance history that allows you to easily assess the asset allocation and risks involved. You won’t be able to see how the fund management plans to use your money, either. It will be impossible to estimate the fund’s success without any standards or measures. It’s possible that whether the fund succeeds or fails will remain a mystery.
No Track Record
The fund that is being launched is very new, thus it does not have a track record. People prefer to depend on a fund house’s prior performance in the lack of a history, which may not be the greatest strategy. This is because a new investment approach has its own set of problems, and you don’t know if the fund firm has the competence to handle them. You also only know the fund’s wide mandate. You have no idea what will make up the portfolio or if it will be able to carry out the mission as envisaged.
Picking a fund with a track record makes a lot more sense if a fund is being created in a category where funds already exist. You’ll know what you’re getting into since you can assess it based on a variety of factors such as historical performance and the danger it poses, among others. Always choose a fund with a track record versus one that is brand new.
NFOs are not like IPOs – There is no benefit of investing in the NFO period
People look at NFOs in the same way they look at IPOs, as we stated at the outset. They believe that if the demand for funds rises, they will gain, just as it does inequities. This idea could not be farther from reality.
This is because the NAV of a mutual fund is unaffected by supply and demand. The reason for this is that because the quantity of units available in stock is limited, the price rises as demand increases. A mutual fund, on the other hand, has no limit on the number of units it can have. Units are generated as and when they are needed.
It is deducted from the returns earned by the portfolio. It’s known as the expense ratio in technical terms. A greater expenditure ratio implies you pay a higher charge, which has an impact on your results.
According to Indian laws, a fund with a lower Asset Under Management (AUM) can charge a greater cost ratio than one with a higher AUM. Due to the modest size of the fund when it was first created, the AMC now has the freedom to maintain the expense ratio higher.
AMCs may introduce new funds to complement or expand the existing product offerings, or because there is a market demand for a certain type of fund. It might be for any number of reasons. So, just because a fund is created doesn’t indicate it’s the best moment to invest in that category of funds. It’s better to stay away, especially if the trigger is market demand (you can figure this out by looking at how many comparable funds have emerged in the recent past).
However, there are a handful of notable exceptions:
- You should consider investing if the NFO is for a closed-ended fund that fills a gap in your portfolio. However, because you will be investing for a certain period of time, you must be informed of the fund’s investment plan.
- It may be good to consider them if you are obtaining a discount during the NFO, such as the 5% discount given by the Bharat CPSE ETF NFO. Because the Bharat CPSE ETF is an index fund, you know exactly which firms your money will be invested in, and you also get a discount.
Investing in non-ferrous metals is a gamble. Rather than trying anything new or unknown, it is better to stick with a current plan that has a track record.
Wait a while to see if the theme or investing strategy plays out as planned, even if it is something unique that may be a good match in your portfolio.