What Are New Fund Offers

What are New Fund Offers?

A New Fund Offer (NFO) is the first subscription of a mutual fund scheme offered by the asset management company (AMC) to the general public. It usually occurs when a new fund is launched and allows the fund house to raise capital for the purpose of purchasing securities such as bonds, equity shares, etc. Investors can subscribe to the new fund offer of the scheme only for a limited period.

During this period, investors can subscribe to the units of the mutual fund scheme at a special price known as the ‘offer price’, which usually is fixed at Rs.10. After the subscription period is over, investors can purchase the units of the scheme at the prevailing offer. NFOs have been found to achieve significant gains once they begin to trade publicly.

New fund offers are cheaper than existing schemes as they are new to the market. They are identical to IPOs (Initial Public Offerings) wherein the public is offered shares of the company for the first time before it makes an entry into the stock exchange. New fund offerings can be for close-ended or open-ended mutual funds.

Should you invest in a New Fund Offer?

In a new fund offer, investors can subscribe to the units of a mutual fund scheme for a fixed price of Rs.10. Most people invest in NFOs to take advantage of the low prices of the units expecting to achieve significant capital gains when the market is at a peak. Many investors also subscribe to NFOs as they feel that NFOs are a value for investment proposition. Fund houses use NFOs for achieving their AUM (Assets Under Management) goals.

Difference between an NFO and IPO

Both IPOs and NFOs are launched to raise capital from the public but the difference between them is that IPOs concern equities of firms while NFOs concern units of a mutual fund scheme. The other differences between NFOs and IPOs have been given below:

1. NFOs are open for subscription for a longer duration as compared to an IPO.
2. NFOs have no classification whereas IPOs are divided into institutional, retail, and HNI categories and a separate quota is allotted to each of them.
3. NFOs generally open for subscription with an NAV not more than Rs.10 and the fund allocates money for the purchase of shares only once the funds have been collected by the fund house. However, in an IPO, premiums or discounts are listed to the issue price based on the perception of institutional and retail investors.
4. In NFOs, the price of the units does not matter but in an IPO, the price of the shares needs to command a better valuation since it will indicate the perceived value of the firm offering the IPO.
5. The market level is significant in case of NFOs while in an IPO, the usage of funds is significant.

Things to Consider before you invest in a New Fund Offer

• Reputation of the fund house - Before investing in a new fund offer, ensure that you do a background check of the investment firm that is going to manage the scheme. The fund house should have operated in the mutual fund industry for a period between 5 years and 10 years. Assess the performance delivered by the AMC over those years and invest only if it has a good track record. If you are not satisfied after doing a background check, you can choose not to invest in the NFO of that particular fund house and pick an NFO of a reputed fund house instead.
• Objectives of the fund - The investment objectives of the fund will give you information about where the assets will be allocated, what are the risk factors associated, liquidity, expected returns, etc. Simply put, you will have an idea about where your fund manager is going to invest your money. The objective of the fund will help you determine if the NFO is promising enough to fetch you optimal returns on your investment.
• Theme of the New Fund Offer - The mutual fund arena is flooded with more than 8,000 schemes and hence, you should invest in an NFO only if it has something unique to offer. Read the scheme information documents thoroughly to understand the theme of the fund. It is always better to invest in a fund which is performing better than to invest in a new fund offer which does not seem like a viable proposition.
• Risks - Investments in NFOs may be a risky affair as it is not possible to assess where your money will be invested, like in an existing fund where you can check for the asset allocation. This is because in an NFO, allocation of funds cannot be done until the entire money is collected. NFOs also do not have a performance history and hence, you will not be able to ascertain how the fund is going to perform.
• Returns - NFOs do involve a certain risk but that does not mean that investing in them is a totally bad idea. Some NFOs can turn out to be winners and fetch you really good returns aiding you in wealth creation. Analyse the return aspect of the NFO if you are really interested in it. However, if you have already invested in the NFO, then it is advisable to do a review once a quarter for the initial 3 years. Doing so will help you understand if the fund is performing well and if not, you can redeem the units and invest in some other fund.
• Investment horizon - Before you decide to invest in an NFO, do not forget to consider your investment horizon and objectives. Some NFOs may have a lock-in period applicable to them which means that you cannot redeem the units until the lock-in period is over. An exit load may also apply on redemption and hence, it is recommended that you do not invest in an NFO if your investment horizon does not align with the investment horizon of the scheme.
• Cost - Another factor that you need to consider before investing in an NFO is the expense ratio. Opt for the NFO if it offers a lower expense ratio than an existing fund having the same investment objectives. Also, check for the exit load charged by the NFO so that you do not lose a huge amount if for some reason, you wish to withdraw from the scheme before the maturity date.
• Minimum subscription amount - The minimum subscription amount for NFOs may range between Rs.500 and Rs.5,000. If you feel that you can afford to make that sort of an investment in one go, you can go ahead and invest in an NFO. Otherwise, you can opt for a SIP (Systematic Investment Plan) in an existing fund with a good track record.