A New Fund Offer or NFO refers to the time when a new product is launched. It is a first time subscription offer for a new mutual fund scheme. An NFO is launched to raise money from the public and, in turn, invest in securities based on the scheme’s investment objective. An NFO is similar to an Initial Public Offer (IPO) of a company. NFOs remain open for a period of usually 15 days.
An NFO offers units at Rs 10 per unit during the initial 15-day subscription window. After this period, investors must buy units at prevailing market NAVs. NAV is basically the total of the market value of all the assets held by the mutual fund minus its liabilities and divided by the number of units issued.
NFOs versus Existing Funds
Many investors believe that the NFO pricing of Rs 10 per unit is significantly lower than NAVs of most existing funds. Is this belief that NFOs are cheaper than existing funds correct? The truth is that it is a misconception. The NAV of an existing fund takes into account the number of units of a mutual fund that have been issued and the assets that the fund holds; an NFO price on the other hand, is just an arbitrary standard that is adopted to gather funds.
When it comes to investing in an NFO or an existing fund, here is what you must take into consideration:
- Lack of track record: Existing funds have a performance track record, and NFO does not. You can read the fund’s information document, review its performance from mutual fund websites, analyze its portfolio and check the fund manager’s track record. In NFOs, much of this is not possible to do.
- High expenses: An NFO has to cover the cost of releasing and promoting the new offer to investors; that means NFO investors must bear these costs. In existing funds, you will not have to face these expenses as they have been covered in the past.
- Portfolio analysis: In existing funds, portfolios have been in place for a while and you can analyze in great detail the nature of assets the scheme holds and how they have changed during the course of time during which the fund has been operational. NFOs usually state an objective but the portfolio has not yet been formed; hence, you can only judge how it will fare once it is operational. Of course while past performance is not a measure by which you can judge a mutual fund, it does give you a window into the fund’s investment philosophy.
So should you invest in an NFO?
You should invest in an NFO only if it brings something new to the table and gives you opportunities to do something you weren’t able to do earlier. It makes sense to invest in an NFO in the following cases:
- New Strategy: The NFO has a new strategy of investments that you can’t find among any of the existing mutual funds.
- New Product: The fund is a completely different sort of a product that has no peers in the market and your portfolio is likely to be able to benefit from it or you could use it for diversification purposes.
- Investment in Fixed Maturity Plans (FMPs) or Close ended products: FMPs are closed-ended funds and investment in FMPs can only be made through NFOs.
It is important to note that an NFO’s initial pricing is not ‘cheap’. Wherever possible, if you have the choice between an NFO and a similar seasoned existing fund, pick the existing fund as there is much more that you can study before making a decision to buy. NFOs should only be considered if they are significantly different in their investing approach.
- The NAV of an NFO cannot be compared to that of an existing fund; in other words, NFOs are not simply 'cheap'.
- Opt for an NFO only if it offers a new strategy or new product; otherwise, existing funds are preferable.
- NFOs have high initial expenses.