What is NFO in Mutual Fund and its Types

There are a plethora of investment options for the modern investor. From company stocks to bonds, you can invest your money in a wide variety of vehicles.

But if you’re looking for a new and exciting opportunity that helps you earn high returns, it's time to explore NFOs. These unique investment avenues help you invest in a particular asset class or market and are ideal for those looking to diversify their portfolio.

To help you ascertain whether these are the right fit for you, this article explores what NFOs are, their types and points you should keep in mind when investing in these.

What is NFO?

A New Fund Offer (NFO) is a first-time subscription offer for a mutual fund introduced by an Asset Management Company (AMC). The primary objective of an NFO is to raise capital through public investors. An NFO is essentially a new mutual fund that hasn’t been offered previously.

NFOs work similarly to Initial Public Offerings (IPOs) offered by companies. These mutual funds are also used to raise capital in exchange or scheme units.  These usually open for a limited period (15 to 30 days). During this time investors can subscribe to the fund. Once the period ends, the NFO units are allotted to subscribers.

What are the Types of NFOs?

Now that you know what is an NFO, it's time to understand its different types. Here’s a look at these:

#1 Open-Ended NFOs: investors can trade units at the scheme’s prevailing Net Asset Value (NAV) at any time.

#2 Close-Ended NFOs: investors can trade units only during the initial offer period since these have a fixed maturity date.

#3 Interval Schemes: these are close-ended schemes that allow investors to trade at fixed intervals which can be annually or semi-annually.

How NFO Works?

A New Fund Offer (NFO) is the launch of a mutual fund scheme where investors can buy units at the offer price before the fund starts trading on the exchange. NFOs allow investors to enter a new scheme during its initial phase, often at a fixed price.

Once the offer period ends, the units are allotted to investors, and the fund starts investing in various assets according to its strategy. The funds raised through the NFO are used to buy securities based on the scheme’s investment objective.

NFOs provide an opportunity to get in early, potentially benefiting from the fund’s future growth.

How is NFO a Good Opportunity?

New Fund Offerings generally present good opportunities for investors. NFOs secure funding from the public and use it to purchase securities, equity shares, bonds, and other assets. Since they are new in the market, they are typically less costly for investors. They have lower barriers to entry than other investments, and have the potential for massive growth in the future. However, there is a slack of historical data to prove that they will be successful. While it does have advantages, it is important to conduct your research before investing your money into them.

How to Invest in an NFO?

There are multiple ways through which investors can put funds into NFOs. The process is typically simple and straightforward, and each method has its own unique advantages. Let’s look into some of the ways you can invest in NFOs, below:

1. Brokers

The most common and basic way to invest in NFOs is to reach out to a broker. Brokers are experienced in investing in different kinds of funds, including NFOs. They help investors to compete all formalities regarding NFO applications. You also receive perks like information regarding the future performance of the funds, as well as doorstep services. However, it is important to ensure that the broker you choose to consult with is registered with and authorised by SEBI. 

2. Online Trading Accounts

Online trading accounts are also an easy and convenient way to start your investment journey. Individuals who already have invested in shares and mutual funds already have trading accounts, ans the same can be used for NFOs. Online trading accounts can also be used to track NAVs (or the Net Asset Value) of your investments.

3. Tata Capital Moneyfy

Another convenient way to invest in NFOs is through Tata Capital’s Moneyfy app. You can compare different funds and choose between them, allowing you to make informed decisions from the comfort of your home. Simply download the app to get started!

Things to Keep in Mind Before Investing in NFO Funds

There are a few key things to consider before investing your funds into an NFO. These include:

1. The Reputation and Performance of the Fund House

Most investors look at past performance when investing in funds since the scheme’s data is always available for analysis. However, NFOs do not have past data to rely on. In this situation, it is essential to check the past performances of the fund house you chose, its reputation, and its reliability. Checking the performance of similar schemes in the NFO market segment can also help.

2. Fund Themes

Another aspect to consider is the theme’s fund and investment objective of the NFO. This can be done by thoroughly studying the fund’s Scheme Information Document (SID). This will have information regarding the securities the NFO will invest in. This can allow you to familiarise yourself with the sector and securities and know what you are investing in.

3. Exit Loads

Another essential factor to look at is the fund’s exit load. Many schemes may charge a percentage of your holdings when you exit the fund. Thorough research regarding different exit loads and timelines can help you find the one best suited for you.

4. Expense Ratio

Next, study the NFO’s expense ratio. The expense ratio refers to the fixed percentage of funds that fund houses require for the expenses of managing the fund. Depending on the management type of the fund, these percentages can be higher or lower.

5. Risks and Returns

Lastly, consider the risks and returns of the NFO you are considering. This information is typically available in the Scheme Information Document (SID). This allows you to determine whether the fund’s risk profile is aligned with your risk appetite.

Benefits of Investing in an NFO

Investing in NFOs can bring several advantages to your portfolio. This could include flexibility, profitability, liquidity, diversification, and more. Below is a more comprehensive look at the benefits of investing in NFOs:

- Flexibility: Closed-ended NFOs offer flexibility to investors of when their funds get invested in the market. For example, if the market is doing poorly, fund managers can hold and invest some of your funds later.

- Lock-In Investment: When investing, spending a long time in the market is vital for better returns. The lock-in period for close-ended funds is usually 3 to 4 years, meaning investors get better returns than if they withdrew their funds sooner.

Final Thoughts

NFOs are an attractive investment option for anyone who has a reasonable risk appetite and wants to drive their returns. Now that you know what is an NFO in share markets, it's time to discuss your next steps.

After all, as important as it is to know your investment options, it’s equally important to choose the right platforms to manage and track their performance. Fortunately, you can turn to the Tata Capital Moneyfy App. Discover top-performing mutual funds, insurance options and even loans- all in one single app.

Download the Tata Moneyfy's Mutual Fund App today!

FAQs on New Fund Offering

What is the meaning of NFO?

NFO stands for New Fund Offer. It refers to the initial offering of a mutual fund scheme to the public, allowing investors to purchase units at a fixed price during the launch period.

Is it good to invest in an NFO?

Investing in an NFO can be beneficial if the fund offers a unique theme or strategy not available in existing funds. However, it involves risk, as the fund's track record is unavailable.

How do I choose an NFO?

Choose an NFO by evaluating its investment strategy, the fund house's reputation, and the experience of the fund manager. Consider its alignment with your financial goals and risk tolerance before investing.

Which is the best NFO to invest in?

The best NFO depends on your financial goals and risk appetite. Look for NFOs with clear objectives, a credible fund house, and innovative strategies that suit your portfolio needs. Always research thoroughly.

Is NFO better than IPO?

NFOs and IPOs both have different objectives. NFOs are for new companies, whereas IPOs are for existing companies wanting to go public. NFOs offer opportunities for early investment, whereas IPOs let you benefit from the success of an established company.

Is NFO tax-free?

NFOs are subject to taxes the same way other fund types are. This also depends on the period and kind of NFO you invest in. It is important to consult a professional for more information.

Can I withdraw money from NFO?

No, you cannot withdraw money from NFOs like regular mutual funds. However, after the investment period is over, you can redeem your investment.

What is the minimum amount for NFO?

The minimum investment amount for NFOs varies on the fund house and scheme type. This number could range from a few hundred rupees to several thousand.

Is Equity NFO taxable?

Equity NFO is taxable just like any other mutual fund type. For example, long-term capital gains are tax-free up to Rs. 1 lakh, whereas numbers exceeding this amount are taxed at around 10%.