New fund offers (NFOs) are first time subscription offers when a fund company launches a new mutual fund. Check out the best reasons to invest in a new fund offer.
The process through which a mutual fund scheme launches a new mutual fund is called a New Fund Offer or NFO. As per the guidelines of the securities market regulator SEBI, a New Fund Offer can be open for a maximum of 30 days. An NFO can be cancelled if the investors do not show much interest in subscribing to it.
In the NFO period, investors can buy units from the mutual fund scheme to subscribe to the NFO at the price of an offer. Usually, this is Rs 10. Upon the expiry of the NFO, the buyers would be willing to buy the fund's units at the current price in the market. Usually, after listing, NFO subscribers gain significant profits.
How do NFOs work?
NFOs are first-time offers to subscribe to a new scheme launched by an asset management company. In order to purchase securities like stocks or government bonds from the economy, it is introduced to raise funds from the public. Usually, a fund company launches an NFO to complete its item basket, or if the investors request a specific investment theme. Closed-end funds, which are usually 3-3.5 years old, can only be purchased during the NFO period.
NFOs are introduced for funds that are new and have no previous track record. This makes NFO slightly uncertain as it is not possible to predict how the fund will behave. The investor must read the offer document carefully. It is also important to understand the investment process that the fund manager is going to follow.
Features of a new fund offer
An NFO needs to explain clearly its investment process, which it will carry out for the investment horizon. The investors should be prepared to comprehend from the offer document what the fund manager will do with the investment money. If the investors are unable to determine the NFO's goals, then the investment method demonstrates weaknesses. A new fund offer can be launched for two types of schemes:
Open-ended funds: this fund is formally introduced following the end of the NFO. At any moment after the release, investors can join and leave the fund.
Close-ended funds: Until its maturity, a close-ended fund does not allow investors to enter and/or leave after the NFO. Typically, this duration is of 3-4 years from the date of the launch of NFO. However, investors may theoretically purchase and sell such a fund's units on the stock market, but the liquidity of such funds on the market tends to be small.
Benefits of a new fund offer
Here are the benefits of an NFO:
Flexibility: Close funds have flexibility when to invest your money on the market. At other times, the fund manager can hold on to your resources and spend the investment amount a little later., even after the launch of the NFO.
Diversification: NFO allows you to diversify your investment portfolio.
No large cash influx: Open-ended funds are prone to sudden outflows and inflows of cash and market volatility. This can force the fund manager to sell his stocks at very low prices, causing a loss to all unit holders in the fund. On the other hand, close-ended funds are locked-in until maturity. This allows the fund manager to make the right investment decisions.
Low minimum subscription amounts: There is a specified minimum subscription amount for an NFO. It usually ranges between Rs 500 to even Rs 5,000. The low pricing makes NFO an attractive choice for investors.
Why invest in NFOs
Here are a few reasons why you should invest in a new fund offer:
NFO is a popular investment option as the net asset value (NAV) is priced at Rs 10 per unit. This makes the NFO cheaper compared to the other funds available in the market. It is a great investment option for investors who are looking for cheaper options with the prospect of a good return.NFOs also allow you to invest in funds relating to a specific theme. These funds allow you to invest in schemes that have innovative strategies.
An NFO allows you instant liquidity as the unit holders of an open-ended scheme can sell or buy the units at any time. There is no lock-in restrictions in the open-ended fund.
The lock-in restrictions of a close-ended fund actually acts as a deterrent against bad investing behaviour. It helps you to make the right investment decisions without getting lured in by the promise of hefty returns.
NFO offers you good and steady returns. Though past track record is not available, you can always review the current returns. It is advisable to do so on a quarterly basis.Investment in NFO is done through the process of Application Supported by Block Amounts. When you apply for an NFO via ASBA, your application amount gets blocked in your bank account. While the amount stays in your account, it cannot be used until the mutual fund unit is allotted to you.
NFO is a great investment option for those investors who have a long-term investment horizon.
The price of the mutual fund is regulated by demand and supply in the market. It is possible to trade the fund at a price that is above or below its real value.
Difference between NFO and IPO
Investors usually get confused between NFO and IPO as they seem to operate on a similar framework. It is important to understand the difference between the two. An IPO is the process through which shares of a private company are listed on stock exchanges and helps the company to go public. On the other hand, the New Fund Offer is a mode of launching a mutual fund scheme to the investors.
The IPO price of the shares can be more or less than the actual price of the shares. The price of the share in an IPO is determined through a book-building process. During the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.
However, no such process of price-discovery is followed in the case of NFO. The pricing of a new fund offer is as per the market value of the units. The market value of the units is also known as the net asset value or NAV. The NAV remains the same even after the new fund offer period closes. The NAV is not susceptible to any price fluctuations as is the case with IPOs.
Guide to investing in NFO
If you’re someone who is looking to invest in mutual funds, you have two options. Invest online or offline by visiting a branch. However, you also have the option of approaching an agent for the same. However, if you’re going through an agent, you need to remember that the agent needs to be registered with the Association of Mutual Funds in India (AMFI), and needs to have a valid AMFI registration number (ARN). You can check if your agent is legally authorised to sell you a mutual fund or invest in a mutual fund on your behalf by visiting the website http://www.amfiindia.com/locate-the-nearest-financial-advisor.
If you are a corporate distributor, then you need to ensure that your employees have registered Employee Unique Identification Numbers (EUIN)). As a distributor, it is also your job to disclose all the commissions payable to you for different competing schemes of various mutual funds.
If you’re investing through a direct plan, then you need to remember that you need to have a financial advisor. However, you need not pay any commission to a distributor, as it maximises the returns from the close-ended mutual funds.
If the investment is done through a distributor, they are required to disclose all the commissions (in the form of trail commission or any other mode) payable to them for the different competing schemes of various mutual funds out of which the scheme is being recommended to the investor.
Investors also have the option to invest directly with the mutual fund either by visiting the mutual fund branch or online through mutual fund website. Forms can be deposited with mutual funds through the agents and distributors who provide such services.
If you are investing in mutual funds, you can use the online trading account for investing in NFO. The account allows you to purchase and sell your NFO units online without any hassle. The online trading account also allows you to track the net asset value or NAV of your investments.
An investor also has the option of investing in NFO through one of the online aggregator websites. This is a hassle-free process and allows investment once KYC is completed.
Investors should not be carried away by commission/gift which is promised by the distributors or agents. Every investor must conduct its own due diligence of the NFO and take an objective investment decision. There are a number of other web sites that give a lot of information about NFO.
Mutual fund investments are subject to market risks. An investor should carefully read all the scheme related documents. Special attention must be given to the main features of the scheme, risk factors and recurring expenses to be charged to the scheme, loads, sponsor’s track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.
An investor should take into account his appetite, age factor, financial position, investment objective, investment horizon, etc. If required, investors should consult financial experts before taking decisions.
Before making an investment, the investor should take into account the track record of the mutual fund/scheme. Investors should also refer to the product labeling of the scheme. As per SEBI regulations, all the mutual funds are required to label their schemes on the following parameters:
a) Nature of scheme – whether the aim is to create wealth or provide regular income in an indicative time horizon (short/ medium/ long term).
b) A brief about the investment objective (in a single line sentence) followed by kind of product in which investor is investing (equity/debt).
c) Level of risk depicted by a pictorial meter as under:
- Low - principal at low risk
- Moderately Low - principal at moderately low risk
- Moderate - principal at moderate risk
- Moderately High - principal at moderately high risk
- High - principal at high risk
Product labeling should be disclosed in:
a. Front page of initial offering application forms, Key Information Memorandum (KIM) and
Scheme Information Documents (SIDs).
b. Common application form – along with the information about the scheme.c. Scheme advertisements.
What is the Net Asset Value of a mutual fund scheme?
The performance of a particular scheme of a mutual fund is indicated by the Net Asset Value (NAV).
NAV represents the market value of the securities held by the scheme. Since the market value of securities changes every day, NAV of the same scheme varies on a day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.
For instance, if the market value of securities of a mutual fund scheme is Rs 200 lakh and the mutual fund has issued 10 lakh units of Rs 10 each to the investors, then the NAV per unit of the fund is Rs 20 (i.e.200 lakh/10 lakh). NAV is required to be disclosed by the mutual funds on a daily basis.
What is the frequency of declaring NAV?
NAV has to be disclosed by the mutual funds on a regular basis. Depending on the type of the scheme, the declaration can be on all business days or on a weekly basis. As per SEBI Regulations, the NAV of a scheme shall be calculated and published at least in two daily newspapers at intervals not exceeding one week. The NAVs should also be made available on the websites of mutual funds. Fund houses are also required to put their NAVs on the website of Association of Mutual Funds in India (AMFI) www.amfiindia.com. This allows investors to access the NAVs of all mutual funds in one place.
What is the expense ratio of a mutual fund?
The expense ratio refers to the annual fund operating expenses of a scheme, which is expressed as a percentage of the fund’s daily net assets. Operating expenses of a scheme include the administration, management, advertising related expenses, etc. If the expense ratio of a mutual fund is 1 percent per annum, it means that each year 1 percent of the fund’s total assets will be used to cover expenses. Information on expense ratios that may be applicable to a scheme is mentioned in the offer document. As per the present regulations, there is no limit on any particular type of allowed expense as long as the total expense ratio is within the prescribed limits by SEBI.
Can I invest in a mutual fund directly without a distributor or agent?
From 2013, SEBI has mandated mutual funds to launch a direct plan for direct investments, which allows investors to invest directly without routing it through a distributor. Direct plans have a lower expense ratio excluding distribution expenses, commission, etc., and no commission is to be paid from such plans. The plan also has a separate NAV. The investor has a choice to make the investment either a lump sum amount, i.e. a onetime payment, or through a Systematic Investment Plan (SIP).