What is NFO: Meaning, Types, Working, and Benefits

What is NFO?

The full form of NFO is a New Fund Offer. It is the initial sale of units of a mutual fund scheme to the public. It is the first subscription offering launched by an Asset Management Company (AMC) for any of the following funds:

• ULIP Fund (Unit Linked Insurance Plan)

• Mutual Fund Scheme

During an NFO, you can buy units of the fund at its inception. This allows you to become an early investor in the scheme.

NFOs are typically launched for a specific investment objective, such as investing in a particular sector, market capitalization, or asset class.

Why Should You Invest in an NFO?

Investing in an NFO from its inception offers you the following benefits:

• Invest at a Lower Initial Price: NFOs are typically launched at a Net Asset Value (NAV) of Rs. 10 per unit. This gives you the opportunity to invest in a new scheme at a lower initial price.

• Growth Potential with Early Entry: NFOs provide a chance to get in on a mutual fund scheme from the beginning, potentially benefiting from its growth right from the start.

• Invest in a New Investment Theme: NFOs are often launched to invest in new or emerging investment themes. This gives you the opportunity to invest in these themes at an early stage, which has the potential to generate higher returns in the long term.

• Asset Diversification: They offer an opportunity to diversify your investment portfolio with a new asset class or investment style.

• Unique Investment Strategies: NFOs may introduce innovative or specialised investment strategies not available in existing funds.

• Take Advantage of Tax Benefits: 

  • ULIP fund plans offer you tax benefits under Section 80C and Section 10(10D) of the Income Tax Act of 1961.

  • Mutual fund investments offer tax-free returns on investments up to Rs. 1 lakh per year on long-term capital gains.

• Potential for Outperformance: A well-managed NFO has the potential to deliver strong returns over time, similar to established funds.

What are the Types of NFOs?

There are mainly two types of New Fund Offers (NFOs) based on Fund Structure, they are as follows:

1. Open-ended NFO: 

   • Allows you to buy and sell units at any time, offering liquidity

   • No fixed maturity period

   • The NAV is calculated and declared daily

   • High liquidity and flexibility

   • Provides continuous availability for investment

   • Most common and suitable for long-term investors

2. Close-ended NFO

   • Has a fixed maturity date and limited liquidity during the lock-in period 

   • The lock-in period is generally 3 – 5 years

   • Once the NFO period is closed, investors cannot buy new units

   • You can't redeem units before maturity

   • Units can be sold only on the stock exchange after the fund is listed

   • Limited liquidity but can offer unique opportunities

   However, you can also categorise a new NFO based on the following criteria:

   Type of NFOs	Description
   Based on Asset Classes:
   Equity NFOs	Launches a new mutual fund focused on stocks or equities Aims to provide capital appreciation over the long term Involves higher risk with higher potential for returns
   Debt NFOs	Introduces a new fund that primarily invests in fixed-income securities Aims to provide stable income and capital preservation Lower risk compared to equity funds
   Hybrid NFOs	Also known as balanced funds Combines both equity and debt investments within a single fund Aims to provide stable income and capital preservation Moderate risk profile
   Based on Sector/ Theme Focus:
   Sectoral NFOs	Concentrates on specific sectors like technology, healthcare, infrastructure, etc. Seek to capitalise on sector-specific growth opportunities It can be riskier due to concentrated exposure
   Thematic NFOs	Invest based on specific themes, like ESG (Environmental, Social, and Governance) or emerging markets Allow you to target niche market opportunities
   Based on Investment Objective:
   Growth NFOs	Aims to achieve capital appreciation They invest in assets with high growth potential Suited for investors seeking long-term growth and willing to accept higher risk
   Income NFOs	These focus on generating regular income for investors, often through dividend payouts They often invest in fixed-income securities like bonds Suitable for income-seeking investors, especially retirees
   Based on Geographic Focus:
   Domestic NFOs	Invests primarily within the investor's home country They may focus on local stocks, bonds, or real estate Ideal for investors with a preference for domestic markets
   International or Global NFOs	Invests in foreign assets, providing exposure to international markets Provides exposure to international equities or bonds Currency risk and global market fluctuations apply
   Based on Fund Manager’s Approach:
   Active NFOs	Managed actively by fund managers  Managers make investment decisions based on their research and analysis to outperform the market Suited for investors who prefer professional portfolio management
   Index NFO or Passive NFOs	Mimics the performance of a specific stock market index Offers diversification and typically has lower expense ratios Lower fund management involvement, lower risk
   Based on Taxation:
   Tax-saving NFOs (ELSS)	Equity-linked savings schemes (ELSS) offer tax benefits under Section 80C of the Income Tax Act 1961 The lock-in period of three years Focus on long-term wealth creation while saving taxes

   Each type of NFO serves different investment objectives and risk appetites, allowing you to choose funds that align with your financial goals and risk tolerance.

How Does an NFO Work?

Let us learn the workings of a new NFO (New Fund Offer) from the list mentioned below:

• Idea and Planning- The insurance company or mutual fund company decides to create a new fund based on a specific investment goal, like stocks, bonds, or a mix of both.

• Regulatory Approval- They need approval from the market regulator, i.e. the Stock Exchange Board of India (SEBI), to offer this fund.

• Pre-launch Period- Before it is available to the public, the fund is in a pre-launch phase. During this time, you can buy units at a fixed price, usually at Rs. 10 per unit in India. This phase can last a few days to a few weeks.

• Subscription Period- Once the NFO is officially launched, you can buy units at the current Net Asset Value (NAV), which fluctuates like a stock price. The subscription period continues for a few weeks.

• Fund Management- The fund manager uses the money collected during the NFO to invest in accordance with the fund's objectives.

• Listing- After the subscription period ends, the NFO units are listed on stock exchanges (if it's an exchange-traded fund) or can be bought directly from the mutual fund company.

• Regular Trading- After listing, NFO units can be bought and sold like any other mutual fund units, based on their NAV.

How to Invest in an NFO?

You can follow the steps mentioned below to invest in an NFO: 

Step 1: Choose an NFO:

There are many different NFOs launched every year, so it is important to do your research and choose an NFO that is aligned with your investment goals and risk tolerance.

Step 2: Open an Investment Account:

If you do not already have an investment account, you will need to open one with a broker or mutual fund distributor.

Step 3: Apply for the NFO:

Once you have opened an investment account, you can apply for the NFO through your broker or mutual fund distributor. You will need to provide your personal details and investment amount.

Step 4: Make the Payment:

Once your application is approved, you will need to make the payment for the NFO. This can be done through online transfer, cheque, or demand draft.

Step 5: Receive Your Units:

Once the NFO is closed, the AMC will allot units to you on a first-come, first-served basis. You will receive your units in your investment account.

How to Choose Which NFO is Best for Investment?

You can consider the following factors to choose the best NFO (New Fund Offering) for investment:

• Objective Assessment: Understand your investment goals if you are looking for long-term growth, income, or a balanced approach.

• Research the Fund: Analyse the NFO's investment strategy, portfolio, and past performance (if available). Check if it aligns with your goals.

• Risk Tolerance: Assess your risk tolerance. New NFOs can vary in risk levels. Pick one that matches your comfort level.

• Fund Manager: Research the fund manager's experience and track record. A skilled manager can significantly impact returns.

• Expense Ratio: Lower expense ratios mean more of your money goes into investments. Choose a new NFO with a reasonable expense ratio.

• Exit Load: Check if the NFO has an exit load, which is a fee for early withdrawals. Avoid high exit loads if you may need to access your money sooner.

• Asset Diversification: Look for diversification within the NFO's portfolio to spread risk.

• Fund House Reputation: Consider the reputation and credibility of the fund house managing the NFO.

• Read the Offer Document: Go through the NFO's offer document for complete details and disclosures.

• Invest for the Long Term: NFOs may take time to mature. Be prepared for a long-term commitment.

• Monitor Your Investment: Once invested, keep an eye on your NFO's performance and make adjustments as needed.

In Conclusion

New Fund Offerings (NFOs) offer you a unique opportunity to get in on the ground floor of a new investment fund. These financial products can cater to various investment objectives and risk profiles. However, it is essential to conduct thorough research, assess your financial goals, and consider the fund's strategy and track record before investing in an NFO. With careful analysis and informed decision-making, NFOs can be a valuable addition to your investment portfolio.