Investing in the financial markets has always been an attractive avenue for individuals, including residents, Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) alike looking to grow their wealth. Among the many investment options available, mutual funds stand out for their ability to offer diversification, professional management, and potentially high returns. One of the ways investors can enter the mutual fund market apart from existing lumpsum or Systematic Investment Planning(SIP) method, is through New Fund Offering (NFO). In this blog we’ll explain all you need to know about New Fund Offering(NFO), how they work, the potential returns, and the benefits they offer.
What is New Fund Offering(NFO)?
A New Fund Offering (NFO) is the initial subscription offer for a new mutual fund scheme launched by an asset management company (AMC). Similar to an Initial Public Offering (IPO) for stocks, an NFO is a way for AMCs to raise capital for a new fund that they are launching. Investors are invited to buy units of the mutual fund at the offer price, typically set at ₹10 in India. Usually, the offer period lasts between 15 and 30 days, during this period you can subscribe straight through the fund house. Once the NFO period closes, the fund is launched, and the units can be bought or sold at the prevailing Net Asset Value (NAV).
NFOs are introduced for various types of funds, including equity funds, debt funds, hybrid funds, and thematic funds, among others. The primary objective of an NFO is to raise funds from investors to invest in securities according to the fund’s investment objective.
Also read: 10 Mutual Funds That Doubled Wealth In 5 Years
How does NFO in mutual funds work?
A New Fund Offer (NFO) in mutual funds is like a launch sale for a new investment scheme by a fund house. This is how it works:
- Announcement: The fund house announces a new mutual fund, explaining what it aims to achieve and where it will invest.
- Buying Period: For a limited time (usually a few weeks), you can buy units of this fund at a fixed price, like Rs. 10 per unit.
- Fund Launch: After the buying period ends, the fund collects all the money and starts investing it according to its plan.
- Trading Begins: Once the fund starts, its units can be bought or sold in the market, with the price going up or down based on how the fund performs.
Also read: What is the 15x15x15 Rule In Mutual Funds for NRIs?
What is the difference between NFO and IPO?
| FACTORS | IPO | NFO |
| Issuer | Companies issue IPOs in their attempts to raise capital. Issue of new shares is known as an IPO. | An NFO is a capital-raising tool used by investment firms or asset management companies (AMCs). NFO is for the creation of a new mutual fund scheme. |
| Fund usage | Businesses either use the money raised to expand their operations or to lower the ownership portion held by the promoter. | What AMCs do is invest the money in different financial assets. |
| Valuation | The price-to-book and price-to-earnings ratios are important for determining a company’s IPO offer price and value.A higher valuation may raise the IPO price. | Unlike IPOs, NFOs do not need to be valued because the funds they raise are invested in the market and divided into fund units. Fund houses issue NFOs with a Rs. 10 face value. On the other hand, the scheme’s NAV is determined by the state of the market. |
| Listing Gains | Investors in initial public offerings (IPO) have the chance to list their gains and make money from trading on authorized stock markets. | Investors are not given any listing gains. |
| How to invest | To apply for an IPO, you must have a demat account. | To apply in NFO, investors should go to the official websites of the fund companies and distributors. |
Key Benefits of Investing in New Fund Offering(NFO)
- Opportunity to Invest in New Themes: NFOs often introduce new investment themes or strategies that may not be available in existing mutual funds. This offers investors a chance to capitalize on emerging trends.
- Low Initial Investment Cost: Since NFO units are typically offered at a face value of ₹10, investors can enter the market at a relatively low cost, especially if they believe in the long-term potential of the fund.
- Diversification: NFOs provide an opportunity to diversify your portfolio by investing in different asset classes, sectors, or themes that you may not have exposure to through existing funds.
- Potential for High Returns: While NFOs come with their risks, they also have the potential to deliver high returns, especially if the fund manager is skilled and the market conditions are favorable.
- Flexibility: Once the NFO period ends and the fund is launched, investors can buy and sell units as needed, providing liquidity and flexibility in managing their investments.
Also read: How understanding the Rule of 8-4-3 can turn your Rs 30,000 monthly into Rs 1.5 cr?
How to Invest in New Fund Offering(NFO) as NRI/OCI?
NRIs/OCIs can legally invest in mutual funds via lumpsum, SIP and NFO route. This includes NRIs, Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs). There are a few legal mandates like getting their Mutual Fund KYC done along with adhering to the rules of FEMA, SEBI, and RBI. Once your KYC is done, you can invest in domestic and international mutual fund schemes offered by Asset Management Companies (AMCs).
Getting your NRI Mutual Fund KYC is mandatory to open an account to invest in mutual funds in India irrespective of the investment amount. The Securities and Exchange Board of India (SEBI) has specified a set of regulations under the Prevention of Money Laundering Act (PMLA), 2002 which mandates that mutual fund houses and intermediaries perform their due diligence on investors before they are compliant to make investments.
Also read: NRI Mutual Fund KYC in India: The Ultimate Guide 2024
Key Things to Consider Before Investing in New Fund Offering(NFO)
- AMC’s Reputation: Study the fund house’s previous performance. Study the past results of their current mutual funds in various market conditions and throughout time. The fund is more likely to be well-managed by a respected and experienced fund company.
- Investment Objective: Understand the NFO’s objective, be it income generation, capital growth, or both. Verify that if it aligns with your financial objectives and risk tolerance. To find out where the fund plans to invest, read the entire documentation.
- NFO Theme: Each NFO has a specific theme, like focusing on a particular sector (e.g., technology), asset class (e.g., equity or debt), or strategy (e.g., growth investing). Ensure the theme fits your investment goals and helps diversify your portfolio. If there’s an existing fund with a similar theme, it might be safer to invest in that instead.
- Investment Horizon and Minimum Investment: NFOs can set minimum investment amounts or lock-in periods. To determine whether the NFO fits your investing period and financial position, take all of these factors into account.
- Associated Costs: Be mindful of additional expenses such as exit loads (fees associated with selling your investment early) and the expense ratio (a fee for handling the fund). It’s important to be aware of these expenses before making an investment because they may lower your overall earnings.
- Taxation: Like traditional mutual funds, NFOs are also to be taxed. Nonetheless, the tax laws governing short- and long-term gains differ depending on the form of fund (debt vs. equity). Understand the taxation of the NFO to avoid unexpected things later.
Also read: NRI Mutual Fund Taxation in India 2024 Explained
Wrapping Up
NFOs provide a unique opportunity to invest in new mutual funds at an early stage, potentially benefiting from emerging market trends and strategies.Before making any investment decision. It’s important to look at your current investments and decide whether you can afford the additional risk before adding a New Fund Offering (NFO) to your portfolio. As any investment that you make should align with your investment goals and risk tolerance this will make you investment journey more stress free and stress free.
Also read: 10 Mutual Funds that Doubled Investor’s Wealth in 3 Years
Invest in NRI Mutual Funds and New Fund Offering(NFO) with SBNRI
NRIs/OCIs can now download the SBNRI App and choose to invest in different mutual schemes and NFO schemes in India with ease and build wealth for the long run. You can also get detailed mutual fund advice from experts at SBNRI. Also, visit our blog and YouTube channel for more details.
SBNRI is an authorized Mutual Fund Distributor platform & registered with the Association of Mutual Funds in India (AMFI). ARN No. 246671. NRIs willing to invest in mutual funds in India can download the SBNRI App to choose from 2,000+ mutual fund schemes or can connect with the SBNRI wealth team to better understand Mutual Fund investments.
Disclaimer: This blog has been written exclusively for educational purposes. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions. SBNRI does not intend to predict future returns, please read all related documents before investing.
FAQs
Is NFO worth buying?
NFOs carry some risk because they don’t have a history, they might not provide special advantages, and the timing might be unpredictable. Usually, it’s wiser to hold off on investing until you see how the fund performs. NFOs are brand-new mutual fund schemes that Asset Management Companies (AMCs) introduce; unlike IPOs, their value isn’t first determined by a particular NAV.
What is the difference between mutual fund and NFO?
An NFO (New Fund Offer) is the initial launch of a new mutual fund, inviting investors to buy units at a fixed price. A mutual fund, on the other hand, is an established fund that is already operational and has a history of performance.
What is a fund offering?
A fund offering, specifically a New Fund Offer (NFO), is an investment company’s first opportunity to sell investors into a brand-new fund. The fund is introduced to the market and money is raised by the corporation to purchase different securities during an NFO. Investment organizations frequently employ mutual funds as a sort of fund offering to draw investors in the beginning.
Is NFO taxable?
Yes, NFO investments are taxable like other mutual fund investments. The tax you owe depends on how long you hold the investment and the type of fund.
Can I sell NFO?
Yes, you can sell NFO units after the initial NFO period ends. Once the fund is officially launched, its units are traded at the Net Asset Value (NAV) on stock exchanges. You can buy or sell these units based on the current NAV.
