Posted on 12/13/2022 11:58:00 AM

Markets are dynamic. They change with political conditions, economic activity, inflation, and other factors. Asset Management Companies (AMCs) study these factors and change their investment strategy accordingly. They may even launch new mutual fund schemes through New Fund Offers (NFO) with an aim to gain maximum benefits. But what are NFOs?

When an Asset Management Company (AMC) or a mutual fund house launches a new mutual fund scheme, it does so through a New Fund Offer (NFO). It raises money through NFO and offers subscribers securities for a new mutual fund scheme. Hence, NFOs in the mutual fund market are like initial public offerings (IPOs) for Corporate Equities.

What is a New Fund Offer?

An NFO allows you to invest in a mutual fund scheme at its offer price before the fund begins to trade in the market. An AMC launches open-ended and closed-ended mutual funds through NFOs. According to the Securities and Exchange Board of India (SEBI), an NFO can remain active in the market for 30 days.

After this period, you can buy the mutual fund units at the Net Asset Value (NAV) instead of the face value. A benefit of investing in NFOs is that you can earn capital gains through a potential price increase once the fund starts trading in the open market.

Who should invest in NFOs?

Since NFOs are available at cheaper rates than investments based on NAVs of funds, they could be considered as a good investment option for investors. Tapping on this thinking, the fund houses also offer other funds for investments. Therefore, anyone whose fund objectives, investment horizon, and risk-return profile match the funds can invest in NFOs to attain their financial goals.

Things to keep in mind before investing in NFOs

Despite the benefits of investing in NFOs, you must carefully consider a few things before you invest.

1. Mutual fund house background

You must conduct a background check of the fund house launching the NFO in the market. The fund house must be well-reputed and operational for at least five to ten years.

2. NFO fund objectives

The mutual fund's objectives must align with your financial goals and risk appetite. Hence, you can consider the asset allocation, investment horizon, risk level, etc., of the NFO.

3. NFO theme

An NFO may follow a specific theme such as growth-oriented funds, capital appreciation etc. You can select funds based on a particular sector to tap into the current market variations. However, such funds have a limited diversification scope, but always consider that they should have a substantial investment strategy to provide you adequate returns. To understand the fine print, you should also consider an experienced fund manager, your risk appetite, and the scheme information document (SID).

4. Minimum subscription amount

NFOs, like IPOs (initial public offerings), have a minimum subscription amount that can be as low as ₹500. You should check the minimum subscription amount for your chosen NFO and must assess whether it fits your current budget.

5. Gains are not guaranteed

An NFO does not guarantee capital gains. Earning significant capital gains is not a given. Predicting the performance of an NFO in the future is difficult. Every investment accompanies a level of risk, and this is true even for NFOs.

Investing in an NFO after reading about it in detail is a good approach. You can invest in an NFO through a broker or by yourself by visiting the fund's official website/app. However, ensure you aren't swayed by the public perception of an NFO and base your investment on a well-developed strategy.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

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