The early bird catches the worm, they say. And investors seem to swear by it. New offerings in the market are surely exciting, and they can offer a lot of growth potential. But there are some risks involved. This applies to New Fund Offerings (NFOs) in mutual funds, too. For all of those reasons, you need to understand how NFOs work. And we’re here to help you with it.
Understanding New Fund Offerings (NFOs)
Before investing in any new funds, you must understand them fully. This will help you decide whether they are for you and help you figure out how to choose one. That’s also true of mutual funds. So let’s start by asking: what is NFO in a mutual fund?
As the name suggests, NFOs are first-time subscriptions for new mutual fund schemes. As an IPO does for companies, NFOs raise capital for the fund manager.
When you find an NFO mutual fund, the first thing you need to look into is the amount they require investors to pay. Next, find out which securities it will be investing in and how much returns are expected. Then, the most important task—assessing risks.
You need to do pretty much everything you should do while investing in any mutual fund. Only more rigorously.
Types of NFOs
Like all other mutual funds, there are two types of NFOs—open-ended and close-ended. Simply put, you can exit the open-ended one at any time. Not so with the close-ended variety, which will require a minimum lock-in period.
Read more about each of these types. And, whatever you choose, make sure that your fund suits your investment objectives and long-term goals.
How is a mutual fund NFO different from a company IPO?
Initial Public Offerings, or IPOs, are for the stock market. NFOs, on the other hand, are for mutual funds. As you may know, there are some other fundamental differences between investing in stocks directly and choosing a mutual fund—which may or may not have an equity component. That difference, of course, defines IPOs and NFOs, too. NFOs, therefore, facilitate diversifying of your portfolio, while IPOs don’t. The former also has a fund manager, but the latter does not.
With an IPO, investors can get a discounted rate. This is done to ensure the demand for them is pretty high. NFOs don’t always have this advantage. They simply rely on the face value of the company or security at the time—assuming there is an equity component. If you invest in the share market via an NFO, you will have to live with not knowing the actual purchase price.
The price of an NFO is usually ₹10. IPO prices vary. However, the latter is likely to yield gains much sooner. Read more about the differences here.
How to invest in an NFO
While investing in NFOs, make sure that you know the process well beforehand. It is not possible to invest in them physically. So you will need internet access.
You can invest directly through the Asset Management Company (AMC) website. Alternatively, you could their app, but make sure you download it from the official website of the AMC or some reliable source like the Google Play Store. Whatever route you choose, the process should be self-explanatory thereafter.
Factors to consider when investing in NFO
If you are thinking about investing in an NFO, consider the following factors.
First, check the past record of the AMC. Also, it is essential that the AMC has been active in the market for at least 5–10 years.
Also, look up and research the type of fund, whether open-end or closed.
Ensure you know all the securities in the NFO well. Do the research you need to.
Benefits of investing in an NFO
There are several benefits of investing in an NFO.
- A good scheme may give you a better deal if you do not know to time the market. That means your returns will be higher.
- Also, NFOs are mutual funds, so they diversify your investment. That means you are safer.
- The price of an NFO is usually ₹10. IPOs may cost much more.
Investing in NFOs provides investors with several benefits. But, before investing, you must do your homework. Learning everything regarding the NFO is crucial to multiplying your wealth. Make sure you go through all the terms and conditions before you settle for any investment.
FAQs
Is it good to invest in NFO?
Investing in New Fund Offers (NFOs) has advantages like low initial cost and fresh investment opportunities. However, it also carries risks, including the lack of a track record and potentially higher costs. Consider your investment goals and risk tolerance before investing in NFOs.
Is it better to invest NFO or mutual fund?
Investing in established mutual funds is generally safer due to a track record and diversification. NFOs lack a track record, have higher costs, and may not be ideal for beginners.
What is the benefit of NFO?
The benefit of NFO (New Fund Offer) includes a low initial investment, diversification opportunities, flexibility in choosing new strategies, and the chance to invest in a fund’s initial portfolio.
Which NFO is best?
Determining the “best” NFO (New Fund Offer) depends on individual financial goals and risk tolerance. It’s advisable to consult a financial advisor to select an NFO that aligns with your investment objectives.
