What are NFOs ? Should I invest in NFO ?
So, you have heard about that NFO and are confused if you should invest in that NFO or not ? If that’s your concern, then don’t worry. After reading this article, you will be able to make the correct decision.
What is New Fund Offer (NFO)?
When an Asset Management Company (Mutual Fund Company) launches a new fund or scheme, it opens it up for a first time subscription for a few days. This process is called NFO or New Fund Offer. An NFO is done to raise money for the fund before the fund manager starts to buy stocks and shapes the fund’s investment portfolio.
SEBI Guidelines for NFO
As per SEBI regulations, an NFO cannot be for more than 15 days of duration. Once the NFO period is over, most funds are converted into open-ended funds which means these funds can now accept fresh money or new investments into the funds. This is basically the construct of a typical NFO.
Types of NFO
The most important factor to be considered here is – Is the fund being offered in an NFO, an open-ended fund or closed-ended fund ?
Open ended funds are those schemes that allow fresh investments. Closed-ended funds are just the opposite. They do not allow any fresh investments. You can invest in them only at the time of NFO.
If the fund is closed-ended, then you can consider investing in an NFO. But, if it is open-ended, then you may hold and do some research before investing.
Investing in NFO – Good or Bad?
The following important points should be covered in the research:
- Most people invest in a fund after looking at the track record of the fund. We generally finalize our investment after seeing the one year, three yr performance, the ratings, the ranking, comparison with other funds, fund’s portfolio etc. Now, the fund being launched in an NFO is completely new with no performance history. Also, after 2018 SEBI has instructed all AMCs to have only one fund per category to avoid confusion among investors i.e, one large cap, one mid cap etc. So, if a fund house comes up with an NFO, then it is likely that the fund manager does not have prior experience in that category. So, it is advised to look before you leap.
- NFO is different from IPO. People have this illusion that NFO is the same as IPO. An IPO is a process by which the promoters open a limited number of shares for subscription by the public to raise capital. This means, the number of shares offered in an IPO is restricted. Unlike this, in an open ended NFO, the number of units keeps on increasing as more fresh investments are made by the public. So, NFO and IPO are two very different concepts and one should not consider them as the same.
- Every scheme charges management fees. These fees are also called the expense ratio of the fund. This helps the AMC to manage the public’s money properly. The mutual fund regulations allow the AMCs to reduce expense ratio as the AUM increases. Generally, NFO funds are allowed to charge a higher expense ratio as compared to the already established fund which has a comparatively less expense ratio. This means NFO are costlier.
- Investors generally fall for the NAV at which NFOs are brought i.e, Rs 10 while they find the NAV of already established funds much higher. But, this is an absurd concept. Because, the money you earn from any mutual fund depends on the relative growth of the NAV of the mutual fund and not the absolute price of the NAV.
So, it is advised to let the fund perform for at least a few months before diving in.
If an NFO is launched under a category which is new in the market and can be seen as a growth-oriented category, then one can consider investing in it. But, when it comes to mainstream categories like large cap, multi cap, ELSS funds, it is better to invest in an already established fund with a proven track record.
For more information on financial matters or if you want consultation on any financial matter, feel free to contact us.