When an asset management company (AMC) offers the units of the mutual funds scheme to the public for the first time it is called as a new fund offer. NFO refers to the introduction of a new mutual fund scheme by an AMC. Through an NFO, the AMC plans to raise capital for purchasing securities for investment.
What initial public offers (IPOs) are in equity markets, NFOs are in mutual funds. Since the scheme is offered for the first time, various important aspects are mentioned in a document known as new fund offer document. Various details like the type of the scheme, terms of issue liquidity provisions such as listing, repurchase and redemption, investment objectives and fees charged to schemes are categorically mentioned in the offer document. Apart from this the opening and closing date of an NFO is also mentioned. The period is usually 30 days. The offer price is usually Rs. 10 during the NFO. Post which, one can buy it at the market price which the mutual funds scheme is trading at. This is called the net asset value (NAV).
The NFO can be launched through both open and close ended schemes. To briefly sum it up here, in open ended schemes, one can buy the units anytime, before or after the NFO and at NAV. Unlike in close ended funds, where there is a fixed maturity and one can only buy during its NFO.
Important factors to evaluate
Usually, one goes for an NFO investment as the units are offered at a nominal cost, eventually expecting to generate better returns post listing. However, there are other aspects to analyse as well. IPOs are offered in favourable market conditions and so are NFOs offered when the markets are in a bull phase. The way NFOs are offered are with special marketing efforts. It is required to put exactly equal and opposite special effort in terms of analysing the offer. Let’s discuss how to evaluate an NFO.
Low NAV doesn’t necessarily mean it is good
One of the biggest misconceptions among investors is that units are available at a cheap price during the NFO period and, hence, it is better to invest at a lower NAV. It is the growth rate of NAV that matters rather than the value of NAV. And the NAV whether it is Rs. 10 now or Rs. 40, will depend only on the returns generated by the securities invested by the fund manager. There is no basis of investing in a fund that has a lower NAV.
Reputation of AMC and fund manager track record
Whenever one decides to invest in a mutual fund NFO, the background check of the AMC is of utmost importance. Different AMCs have different approaches, styles and value systems in operating the mutual funds schemes. An investor has to be comfortable with the AMC, before investing in any of its schemes. Though it is not a thumb rule, traditionally it is seen that the history of the fund house influences the performance of the new NFO. It will help the investors to understand the performance delivered for other funds during the market ups and downs.
Furthermore, the background check of the portfolio manager is essential, especially in the case of actively managed funds. If a fund has a good and consistent fund manager who has given good performance in the past, then it can be safely assumed that fund will give good returns in the future too. Eventually, a fund manager with longer experience has seen different economic cycles and has aligned the portfolio accordingly.
Cost of investment and expense ratio
Cost is always a drag on returns. While investing one must also give importance to the cost involved in investing. This helps investors to estimate the returns. Even though there is no entry load, in the case of NFOs, some of them may charge exit loads if the redemption happens before the completion of the tenure. For instance, based on Mr. A’s financial goals, he has an investment horizon of three years. If the lock-in period of the scheme is longer, then the returns can be affected due to exit loads.
Apart from this, one must also check the expense ratio of the fund. Expense ratio is the annual fee charged by the asset management company for managing money. Usually, lower the ratio, the better it is. However, one must understand that this parameter is more important while other parameters of the schemes are similar in nature and one has to select anyone out of it.
Minimum investment amount
This is not applicable to all investors. There are few who consider the minimum investment amount as one of the barriers. In such cases, a minimum subscription amount also helps to decide where the investor is willing to invest in the NFO. Usually, the minimum subscription amount ranges from Rs. 500 to Rs. 5000. One must consider this aspect if they can spare that amount for investment. It is not advisable to go for systematic investment plan (SIP) in NFO as the past performance record is not available.
New theme or a unique idea
When investing in an NFO, try to look at the investment objective. Check if there is any novel concept in it. It is to understand if the NFO offers a new theme or something that existing schemes don’t offer. If there is no novelty, it may result in investment overlapping. Further, for investing in an NFO, either it should give one the exposure to an unexplored asset class or a unique investment strategy.
Conclusion: Investing in an NFO is usually not considered a priority option while investing. Unless one’s investment strategy allows, financial goals are aligned to it and one is getting exposure to a new asset class, it is advisable to skip an NFO.
Pro Tip: Focus on getting exposure to an unexplored asset class through an NFO. Else it is advisable to opt for existing performing schemes.