New Fund Offers, or NFOs, are first-time subscription offers to investors from Mutual Fund companies launching new schemes.
Quite often, fund houses launch NFOs as a way to provide investment schemes that aren’t already part of their product basket.
In recent years, NFO launches have hit a new high, and more are expected in the near future. Market regulator SEBI’s recent guidelines on mutual funds categorisation and classification have also led to new mutual fund schemes being launched.
In case you are contemplating investing in NFOs, here are five important features to know about them.
Every NFO has a certain theme well described in its prospectus. If it’s an equity scheme, it could be a large-cap oriented fund, a mid-cap one or a multi-cap oriented fund. It can also be a hybrid fund – having equity as well as debt instruments as proposed securities to invest in. Or it can be a sector fund with underlying securities to be picked from a certain sector – say, auto, banking, pharmaceutical, or IT, among others. You should try to gather information about this from scheme’s prospectus so that you develop a fair idea about what you are going to invest in.
Since the fund is a new launch and is open for subscription, there is no portfolio which you can see of the scheme. As the money is being collected from investors, you don’t find holdings of the scheme as the fund manager has not yet started deploying cash to construct a portfolio. At such times, an investors can only refer to the intentions of the proposed fund and get a rough idea about what the portfolio would look like. However, your assumptions could be different from actual construct of the portfolio.
Performance Track Record
A newly launched fund at NFO stage is just an idea – a theme of investment and a proposal for raising money for investment which has specific characteristics. It neither has an asset under management (AUM) nor a portfolio, and obviously does not have a performance track record, which normally you get in an established fund. Further, as an investor you have no idea how the scheme’s performance will be going forward. Its success depends on the fund manager’s investment expertise, economic cycles, and macroeconomics in the long-term. Though it could be a bit risky, at the same time one should not forget that all the existing well-established funds of today too were at the NFO stage at one point of time.
Unit at Rs 10 & Expenses
Units allotted during the subscription process come at a flat price of Rs. 10 per unit for all NFOs. Normally, the minimum investment by an investor in new offers is required to be Rs. 5,000. You can either do lump sum investments or go for a systematic investment plan if it is not a close-ended fund. And once the fund goes live after allocating its raised money to holdings and constructing a portfolio, the value of the units start changing on a daily basis. In terms of costs, the initial expenses of NFO are generally on the higher side as the fund size is small and the fund house has spent money on the fund’s promotion. For instance, if a similar existing fund is charging investors, say 1.75% as expense fees, a new launched scheme may charge investors 2% or more.
Closed-end or Open-End?
NFOs come in both these forms. In closed-end new offers, investors can do only a one-time investment in the form of lump sum. Investments thus made have a certain lock-in period of 3-5 years. However, in an open-ended NFO, you can do a lump sum investment and can also start an SIP as the scheme continues to remain open for subscription.
Since there’s no past data for an NFO, an investor cannot measure its performance. The risk of investing in a new fund needs to be evaluated. You can opt for NFOs provided you have a risk appetite and if the fund suits the financial goal for which you’re investing. You can also seek help of an expert while deciding about investing in NFOs.
The writer is CEO, BankBazaar.com.