Personal Finance

All you need to know about NFOs

December 20, 2019

All you need to know about NFOs

With the evolution in the realm of financial products, there has been a positive outlook from investors in exploring and experimenting with ever new products. The sentiment continues to be on the affirmative with New Fund Offers (NFOs) that aim to build wealth and are being offered across various fund categories. NFOs being a relatively new product offering require that as investors you first acquaint yourself with it. If you are considering investing in these, first understand the finer nuances of this product.

What are NFOs and how do they work?

An NFO is when a fund house offers a new mutual fund scheme to the public for the first time for subscription. The aim quite simply is to pool in money from a number of investors to invest in the underlying securities like stocks or bonds, based on the scheme’s investment objective. AMCs launch NFOs to provide products that are not already present in its product basket. The NFO remains open for investment for a limited period. You can invest in the units of an NFO at the offer price which is usually set at Rs 10 per unit. After the limited period gets over, you may invest in the scheme at the prevailing Net Asset Value (NAV).

You may find NFOs for open-ended funds as well as closed-ended funds. In the case of open-ended funds, you can invest in the units of the scheme when it reopens for subscription. At Paytm Money, you can invest in NFOs of open-ended growth funds.

How can you benefit from investing in NFOs?

If you are on the lookout to add new exposures to your portfolio, then NFOs could be an option you can explore.

Let’s have a look at the various benefits of investing in NFOs.

  • Innovative Exposures – The unique selling proposition of an NFO lies in the innovative strategies which the fund house wants to explore via this opportunity. It can be an exposure to new asset class/index/commodity which one may not find in the existing open-ended funds. By investing in an NFO, you get an opportunity to boost your return on investment via the novel underlying securities which the NFO aims to hold.
  • Option to Diversify your Portfolio – Oftentimes, market swings can cause your portfolio allocations to get concentrated in a particular asset class which would require some attention. Many investors may choose to rebalance their portfolio to adjust the allocations as per their risk profile and financial goals. Others can turn to NFOs to diversify their portfolios while also making sure that the overall portfolio risk does not sway beyond tolerable limits.
  • Attractive Offer Price – NFOs are usually offered at an attractive price of Rs 10 per unit. It is an opportunity to execute a promising strategy at an affordable price. When it comes to NFOs if you delay your investment decision you may end up investing in the same scheme at a relatively higher NAV after the NFO period gets over.
  • Liquidity – If liquidity is something you wish to incorporate in your portfolio, then investing in NFOs of open-ended funds could be one way to achieve that. You can also subscribe to the units any time once the scheme reopens for subscription post the expiry of the limited period.

Things to consider before investing in NFOs

NFOs can prove to be a lucrative investment avenue for an investor but as goes with any form of investment, prior to investing in one, you should be mindful of a few important things.

Unlike the existing mutual fund schemes, given that NFOs are relative newcomers, these do not have a historical track record. In such cases, you may want to examine the performance history of the fund house which is offering the said NFO. AMCs which have a long operational history are better placed to handle the market cycles. Along with this, you may also want to analyse the management history of the fund manager with regards to the existing schemes.

As mentioned earlier, NFOs are all about taking exposure to a new investment strategy, hence, remember to gauge the scheme’s structure and the risks involved before investing. If you are not sure about it or if it doesn’t fit your risk profile, then you may be better off avoiding it.

If you feel NFOs are a good option for you, you can start investing in the direct plans of NFOs on our app. Browse through all announced NFOs, and opt-in to get notified when they are open for subscription. Also, let us know about your investing experience in the comments below. These help us to improve our offerings and our services to bring a smoother investing experience to you.