Mutual Funds: 7 game-changing factors to check before diving into an NFO

An NFO is the initial subscription offer for a new mutual fund scheme launched by an asset management company. During this period, investors can purchase units of the mutual fund at the offer price, typically set at Rs. 10 per unit.

NFOs are akin to Initial Public Offerings (IPOs) in the stock market, allowing investors to get in at the ground level of a new investment product.

New Fund Offers (NFOs) present a unique opportunity for investors to enter a scheme at its inception. This article delves into what NFOs are, their hidden aspects, and the major considerations investors should be aware of before participating.

Key features of NFOs

Limited Offer Period: NFOs are available for a limited time, ranging from a few days to a few weeks. Once the offer period closes, the fund will open for continuous purchase and redemption at prevailing Net Asset Value (NAV) prices.

Opportunity to Enter Early: Investors can participate in the fund’s growth story from the beginning. This can be particularly advantageous if the fund performs well over time.

Cost and Pricing: During the NFO period, units are offered at a fixed price, usually Rs. 10. Post the NFO period, units are available based on the NAV, which fluctuates with market movements.

Hidden secrets of NFOs

While NFOs can be attractive, there are several hidden aspects that investors should consider:

Track Record and Performance: Unlike existing mutual funds, NFOs lack a performance history. Investors must rely on the AMC’s reputation, the fund manager’s track record, and the investment strategy outlined in the offer document.

Marketing Hype: AMCs often launch NFOs with aggressive marketing campaigns. It’s essential to look beyond the promotional material and assess the fund’s potential based on objective criteria.

Fund Strategy and Objective: Thoroughly understanding the fund’s investment objective, strategy, and asset allocation is crucial. Investors should ensure that the NFO aligns with their financial goals and risk tolerance.

Expense Ratio: The expense ratio of the fund can impact returns significantly over time. Comparing the expense ratio of the NFO with similar existing funds can provide insight into the cost-effectiveness of the investment.

What are the different types of NFOs?

Open-Ended: Investors may invest in and redeem their investments in these schemes anytime. Investors are typically permitted to join or quit the plan as they like at the applicable NAV. They are also subjected to the exit load, if applicable, even after the initial NFO is withdrawn.

Closed-Ended: These schemes are created to collect a pool of money for investments in securities. After this, they can be closed to new transactions, restricting access to them until the maturity term has passed. Nonetheless, the fund companies advertise these closed-ended schemes on the stock exchanges, and if you choose to exit the scheme, you may trade these units on the exchange.

Interval Funds: These types of mutual funds combine features of open-end and closed-end funds. These NFO funds offer periodic intervals, such as quarterly or semi-annually, during which investors can buy or sell shares. Outside of these specified intervals, the fund typically restricts redemptions, creating a form of liquidity management.

Major considerations before investing in an NFO

Fund House Reputation: Evaluate the AMC’s history, expertise, and past performance of other funds managed by them. A reputable AMC with a proven track record is more likely to manage the new fund effectively.

Fund Manager’s Expertise: The fund manager’s experience and past performance play a vital role in the fund’s potential success. Research the fund manager’s previous achievements and their approach to fund management.

Investment Horizon: NFOs are best suited for investors with a long-term investment horizon. This allows the fund sufficient time to implement its strategy and generate returns.

Risk Assessment: Understand the risk factors associated with the NFO, including market risk, interest rate risk, and credit risk. Ensure that the fund’s risk profile aligns with your risk tolerance.

Fund Category and Benchmark: Identify the category of the fund (e.g., equity, debt, hybrid) and the benchmark it aims to outperform. This helps in setting realistic expectations for returns and comparing the fund’s performance with peers.

Regulatory and Legal Aspects: Review the regulatory framework governing the NFO and ensure that the fund complies with all legal requirements. This includes checking the SEBI registration and adherence to disclosure norms.

Lock-in Period: Some NFOs, particularly those in the ELSS (Equity Linked Savings Scheme) category, come with a lock-in period. Understand the implications of this lock-in on your liquidity needs.

In conclusion, investing in an NFO can be a strategic move, offering the potential for significant returns if chosen wisely. However, it requires careful evaluation of the fund’s objectives, strategies, and management. By understanding the hidden aspects and major considerations of NFOs, investors can make informed decisions that align with their financial goals and risk appetite.

Always remember, while NFOs provide an opportunity to invest in new schemes, they are not inherently superior to existing funds with established track records. Conduct thorough research, seek professional advice if necessary, and make informed investment choices to maximize the potential of your investment portfolio.

Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited