The start of the year had been quite fruitful for the stock markets with a post-pandemic recovery and a continuous bullish run. The mutual fund houses have tapped into this market sentiment and launched several NFOs in the first half of 2022. Also after the temporary ban of three months by the SEBI on the launch of new funds was lifted, several AMCs are in the process of launching new NFOs to take advantage of the market trends. So what are these NFOs and how do they benefit average investors?
Given below is the meaning of NFOs and the key details relating to the same.
What are NFOs?
NFOs are new fund offers of the mutual funds that are launched by the fund houses. During the NFO period, which is 15 to 20 days, the units of the fund are available at the offer price or the face value of the units (usually Rs. 10 per unit). Investors can subscribe to the units at this price and can get exposure to a diverse asset class at an effectively lower investment cost. After the NFO period is closed, the units of the fund will reopen for subscription at the prevailing market NAV. The prime benefit of investing in NFOs is tapping into good investment opportunities and increasing the net portfolio returns over the investment horizon.
Who should invest in NFOs?
NFOs are a good investment opportunity for investors as they are available at a cheaper rate as compared to investing based on the NAV of the fund. The fund houses tap on this thinking of the investors making the fund lucrative. Therefore, if the crucial parameters like fund objective, investment horizon, the risk-return profile of the fund, etc. are in sync with the investment expectations of the investors, such NFO is a worthy addition to their portfolio.
What are the factors to consider before investing in NFOs?
The launch of an NFO is quite exciting in the market and improves the market sentiment in general. There are multiple NFOs that are launched in the market and it is difficult for investors to participate in all of them. Therefore, given below is a list of key considerations that can help investors select a quality NFO and improve their investment portfolio in general.
- Reputation of the fund house
The first and foremost point to consider for investment in any NFO is the reputation of the fund house. An AMC that has consistently launched good mutual fund schemes that have historically performed well will definitely attract more investors. The goodwill of the fund house will instill confidence in the investors that the fund has the potential to achieve its objectives and maximize returns for the investors.
- Investment horizon and investment amount
Another important consideration is the investment horizon of the fund. Some NFOs may come with a lock-in period and may also have a different investment horizon that may not match the investment style or objective of the investors. Also, NFOs have a definite minimum investment amount that may be different from the amount when the fund is open for a regular subscription. Hence, it is important to understand these parameters and ensure that the investment budget and investment horizon is in line with the expectations of the investors as well as their financial objectives.
- Objective of the NFO
The objective of the NFO is essentially the framework that it will follow to select its assets or allocate funds that ultimately generate returns for the investors. The objective of the fund should be in line with the risk returns perception of the investors to ensure a profitable portfolio. Hence, investors need to understand the basic objective of the fund and its investment pattern before making an investment decision.
- NFO theme
NFOs are based on a specific theme which can be capital appreciation or value investing or a growth-oriented fund. Funds can therefore select assets based on a specific sector to tap into the current market swing or the uptrend. Such sectoral funds have a limited scope of diversification, however, they should have a robust investment strategy as the fund should be capable of providing returns to the investors even if the sector is cyclical in nature.
- Other factors
A few other factors that should be considered by investors while selecting an NFO are yeh fund manager details ( their experience and expertise), SID (scheme information document to understand the fine print), personal risk tolerance, etc.
Conclusion
NFOs are an excellent opportunity to reevaluate the investment portfolio and include new funds that may be more dynamic and can help in meeting the investment goals at a faster pace. However, it is advisable to not be carried away with the market buzz around an NFO if it’s nothing more than old wine in a new bottle, i.e., if there is no value addition to the personal investment portfolio other than increased outflow of capital investment with limited additional returns.
FAQs
The key benefit of investing in NFOs is the opportunity to get exposure to diverse asset classes at a relatively lower capital investment.
During the NFO period, the units of the fund are available at the face value (usually Rs.10 per unit). These funds are then pooled after the subscription period ends and are invested in assets as per the investment objective of the NFO. Investors can then purchase units of the fund from the market at the prevailing NAV if the fund is an open-ended fund.
Yes every NFO has a predetermined subscription period that is notified at the time of its launch during which investors can purchase the units at the offer price.
Yes. Some NFOs have a lock-in period of 3 to 5 years depending on their investment objective and the guidelines mentioned in the SID.
