How to Invest in New Fund Offer (NFO)?

Last Updated: 23 Jan 2024

What exactly do we understand by an NFO or a new fund offering? Typically, you can understand NFO as the mutual fund equivalent of an IPO. NFO is the fresh issue of a mutual fund scheme to raise fresh capital from investors. Currently, SEBI allows an AMC to have one fund per category, except in case of sector funds and index funds , where there is no such limit. Normally, investors and fund houses try to capitalize when the markets are at peak intending to get better returns from the market. The asset management companies try to seek this as an opportunity by releasing a New Fund Offer (NFO) at the peak so as to ensure it is easily sold. Let us start with a sample of Tata Nifty India Digital Fund.

Mutual Fund	Tata Mutual Fund
Scheme Name	Tata Nifty India Digital Exchange Traded Fund
Objective of Scheme	The investment objective of the scheme is to provide returns that corresponds to the total returns of the securities as represented by the Nifty India Digital Index, subject to tracking error. However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved.
Scheme Type	Open Ended
Scheme Category	Other Scheme – Other ETFs
New Fund Launch Date	14-Mar-2022
New Fund Earliest Closure Date
New Fund Offer Closure Date	25-Mar-2022
Indicate Load Separately	Entry Load: NA Exit Load: Nil
Minimum Subscription Amount	5000/-

Understanding the Concept of New Fund Offer (NFO)

Just like an initial public offering (IPO) raises fresh money from the public on behalf of a company, an asset management company raises capital from the public by launching a New Fund Offer (NFO). The NFO is released and kept open for a limited time, during which investors get the opportunity to decide whether they want to invest in the scheme or not. AMCs release NFO usually for Rs.10. The reasons for an NFO could be to launch a missing fund class or to launch multiple filings of sector fund and index funds, where there are no upper limits.

Highlights of a New Fund Offer(NFO)

Here are some highlights of a mutual fund NFO.

• The NFO is used by the AMC to raise capital from the public to invest in securities, bonds, shares, and so on
• NFOs are good ideas when there are products missing in the basket of an AMC or where some specific concept like commodities, banks or digital are the flavour of the day.
• Normally, the NAV of the NFO does not matter. However, when you target new ideas, an NFO is attractive to investors as it is available at a psychologically low price.

Different Types of New Fund Offers(NFOS)

Broadly, the NFOs that you invest in can be issued by the AMC in 3 broad forms. Here are the 3 broad types of NFOs issued.

• Close-ended funds – issue a fixed units in an NFO. Once the NFO is completed, the fresh investments and redemptions in the fund are closed. The only exit route available in such cases is the listing of these NFOs, since listing is mandatory in case of closed ended funds. The time period for a typical closed ended NFO is 3-5 years. During this period, the AMC window is shut and only stock exchange window is available.
• Open-ended funds – permit continuous buying and redemption of the fund at prices linked to the NAV. The purpose of the open ended fund is the same as closed ended fund, the only difference being that the open ended funds need to keep more liquidity available in the fund corpus. In an NFO, new units are created. Your actual cost will be debited to the NAV so NFO of open ended fund does not mean zero cost.
• Interval funds – are a mix of closed ended and open ended funds. They are closed ended funds but do allow purchase and redemption on the AMC window at regular intervals, which could be annual or semi-annual.

How to Invest in New Fund Offering (NFO)?

It is possible to invest in new fund offerings through the offline mode and also the online mode. A quick word before you invest in an NFO of a fund. You need to have completed your KYC , so first check your KYC status and then invest. If you put in your application for the NFO and found to be KYC non-compliant, then your application gets rejected. Let us look at investing in NFOs online and offline separately.

Investing in NFOs – Offline Mode

An offline mode is wherein you fill up the physical form, sign with your folio number / other details after verifying your KYC status.

• Offline Investment in NFO is normally done through a broker but it can also be done directly through the AMC office. The AMC will guide you through the process.
• In case you are going through an authorized broker, get in touch with the broker and submit the form, cheque and other details.
• In most cases, the broker will also double up as a financial advisor and offer you advise on fund selection, structuring SIP etc.
• If you already have a folio number for that AMC, then you can just use the folio number and most of your data is pulled out by the system.
• Fill up the complete offline form, verify the details and then submit it to the broker after signing it and also attach the cheque for the NFO payment.

Investing in NFOs – Online Mode

An offline mode is wherein you fill up the NFO application online. You can verify KYC status and then proceed to invest online. You can use the web interface or our online trading app

• The first step is to Login/ register to your Online Trading Account using your unique user name and password as well as second level authentication.
• You can check the available NFOs on the website itself. Normally, your online broker will provide you all the NFO investment details.
• Choose the best fund to invest and the amount to invest based on your proposed allocation. There are online resources to help you in the process.
• Finally, you need to enter the investment amount and whether you want to participate in the form of lump sum investment or by way of SIP.

Four Important Things to Know Before Applying in an NFO

1. Mutual Fund NFOs are very different from IPO

   There are some subtle differences between the NFO and an equity IPO. First and foremost, an equity market IPO can entail raising of fresh funds by the company or in the form of an offer for sale (OFS) by interested investments. On the other hand, an NFO is only meant for fresh fund raising and there are no limits to the amount it can raise. Secondly, IPOs have separate quotas for retail investors, HNIs and for institutions but there are no such special quotas in mutual fund NFOs. Lastly, in equity IPO, the price is determined by forces of demand supply via price discovery. The NFO has nothing to do with demand as the supply is anyways unlimited. The NFO price is fixed at Rs.10 in all cases.

2. NFOs are not attractive just because they are available at rs.10

   This is a popular myth. In an NFO, the NAV has only academic importance. What really matters is the level of the market at which you buy the mutual fund, largely in case of an equity mutual fund. Buying a mutual fund in the secondary market at a NAV of Rs.45 is a great idea when the Nifty is quoting at 14 times trailing P/E. On the other hand, NAV of Rs.10 is a bad idea if the Nifty is quoting at a trailing P/E of 24.

3. NFOs also have a cost to it

   When a mutual fund comes out with an NFO it has to spend heavily on marketing, publicity and distribution. It entails higher costs in the form of advertising, publicity, printing of forms and marketing collaterals, road-shows and broker meets across the country etc. Additionally, most brokers and distributers demand upfront commission and trail fees. When these are added up, the upfront cost of an NFO is quite high. The only difference is that the costs get debited to your NAV and that is the reason most NFOs start routine purchase and sale at deep Discount.

4. NFOs are not automatic value creators

   Ironically, most MF NFOs get bunched around market peaks so it is common to see them under-performing in the first few years. Normally, mutual fund NFOs try to ride the massive rally and also try to capitalize on the frenzy surrounding an equity rally. In short, you are likely to start off with a disadvantage.