NFOs: A beginner’s guide to investing in new fund offers

Imagine being one of the very first investors to get a first subscription of a new and potentially profitable mutual fund. This is precisely what an NFO, or New Fund Offer, offers. NFO occurs when an asset management company (AMC) launches a new mutual fund scheme with an initial offer price, launch date, and closing date. It gives interested investors an opportunity to join a new fund early before its NAV is determined.

And the best part? NFOs come with a low entry-level investment, helping investors enter the market with less capital and minimum experience. They are open for a limited period and can be bought online through different digital platforms and mutual fund investment apps. 

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Types of new fund offers 

NFOs are available in two main types: close-ended and open-ended mutual fund schemes.

Open-ended NFOs do not have a fixed duration. Investors can subscribe to the scheme throughout its existence. These schemes remain open for subscriptions and redemptions, allowing investors to enter or exit at any time. The units are typically bought and sold at the Net Asset Value (NAV) and exit load (if applicable). The process is almost similar to that of buying a mutual fund online

Close-ended NFOs have a specific duration or lock in period. During the NFO period, investors can subscribe to the scheme and purchase units. After the NFO period ends, the scheme is closed for further subscriptions. However, investors who wish to exit their investment before the scheme matures can sell their units on the stock exchange where the scheme is listed.

Benefits of investing in NFOs

  • Early entry: A new fund offer allows investors to enter a new scheme at its inception, potentially benefiting from its future growth.
  • Lower expenses: NFOs often have lower expense ratios compared to existing schemes, offering cost advantages to investors.
  • Unique investment themes: NFOs introduce innovative investment themes or strategies that may not be available in existing schemes.
  • Opportunity to earn higher returns: Investing in a new fund at an early stage helps you earn higher returns as you participate in its growth over time.
  • Diversification: With NFOs, you can diversify your portfolio by adding new asset classes and sectors with innovative themes.

Risks associated with investing in an NFO 

  • Overvaluation risk: Investing in NFOs often carry the risk of overvaluation in the emerging industry they track due to lack of historical data.
  • Limited performance data: Compared to established mutual funds, NFOs have limited historical data on their performance. This lack of data makes it difficult for investors to assess the scheme’s risk and potential returns, increasing the investment risk. 
  • Herd mentality: Limited subscription period sometimes creates a sense of urgency among investors. This urgency may lead to a herd mentality, where investors rush to invest without thoroughly evaluating the scheme’s fundamentals.

Investing in NFO the right way

A new fund offer in mutual funds helps investors to invest in new and potentially profitable schemes. However, they have associated risks as well. Since NFOs usually do not have a track record, it becomes important to evaluate the fund house, check fund manager’s credentials, and read offer-related documents to understand the fund’s performance potential. 

Once you invest in NFO, monitor your NFO regularly. Pay attention to its performance, investment strategy, management team, exit load, cost structure, and other key metrics. This way, you can spot opportunities and risks and make strategic adjustments for a healthy portfolio.