A mutual fund house or Asset management company has the right to create and launch a new mutual funds scheme per SEBI guidelines. The initial offering or launching phase of any scheme by AMC/fund house is known as NFO in mutual funds.
The fund house uses this period to raise funds for the new schemes to manage and invest in various financial securities.
In India, 72 NFOs (46 passive and 26 active funds) were launched in 2021 and collected around Rs. 52,734 crores. In 2022 (till date), 57 NFO launches have completed with an inward cash flow of Rs. 21,464 crores.
Is there any special to invest in NFO? Is NFO better than systematic investments plan (SIP)? What is the process for investing in NFO?
So, in this article, we will break down each concept that is associated with an NFO.
What is NFO?
The full form of NFO in the mutual fund is New Fund Offer. NFO is the initial period offered by the AMC to subscribe to a unit of funds at a base price of Rs. 10.
NFO is as same as IPO (Initial public offering) in the Stock market. Every fund house should provide the complete detail of the fund like,
- Scheme Goal and Objectives.
- Type of the scheme
- Asset Allocation
- Fund Managers Details
- Fund’s portfolio
- Expense Ratio
As per SEBI guidelines, a new scheme will be under a new fund offering and will be active in the open market for up to 15 days.
During this period, AMC promotes the scheme through various mediums to make as much as investors pool funds into the new scheme. These funds are invested in multiple securities with the help of the fund manager and its associates.
Post the NFO period, both open-ended, closed-ended, and ETFs (Exchange-traded funds) are open for trade in the market.
Is it profitable when mutual funds are invested during NFO, as they are available at base NAV (Net Asset Value)? Of course, yes, with a condition of holding for a minimum of 15-20 years, the capital gain is 20+ times higher than the investment.
NFO Process in Mutual Funds:
As per SEBI regulation, the NFO in mutual funds of India should not be more than 15 days for any scheme. In the case of Equity funds, the NFO open period can be up to 15 days, and it’s just 3-4 days for debit and other short-term schemes.
Once the NFO period completes, the AMC uses a base value of NAV as Rs. 10 to calculate the total units in a mutual fund. Post calculating the number of units; it has to allocate the units to the investors within 5 working days.
If the allotments are made to any investors for any reasons violating the laws, the invested amount will be refunded to them.
If the mutual fund scheme is open-ended, you can still buy units after the NFO. Schemes that can be entered into or exited at any time are considered open-ended mutual fund schemes.
However, closed-ended mutual fund schemes never allow you to buy units after the NFO period.
Important Regulation for NFO in Mutual Funds:
SEBI regulates how much a new fund must pool investments during the NFO period. As per the regulations, the minimum pool of investments for debt-oriented and balanced hybrid schemes must be Rs. 20 crores, and the other schemes should be a minimum of Rs. 10 crores.
Every mutual fund should adhere to SEBI’s 20-25 rule; no single investor (institution/retail) should hold more than 25% of the total investment.
To ensure this, the AMC should collect funds from a minimum of 20 investors during the NFO period of any new schemes launched.
Every NFO should stick to the 20-25 rule of mutual funds.
SEBI has informed the fund house to invest a minimum of 0.3 to 1.3% of the total investment or 50 lakhs into the total AUM (Asset under management).
SEBI has asked fund houses to increase their stake in schemes according to their risk level.
Due to this, fund houses may have to invest more in Equity Funds instead of Liquid and Overnight Funds. Despite this, SEBI has yet to clarify how it plans to implement the new skin in the game rules.
Types of New Fund Offer:
Closed Ended Funds:
During the NFO period, the closed-ended mutual funds allow investors to purchase only the pre-fixed units. At the same time, investors can only buy the fund units during NFO.
On the other hand, investors can only redeem or exit from the mutual fund post maturity of the scheme.
In the time of liquidity, i.e., if an investor needs an exit before the maturity period, the fund’s NAV fluctuates depending on the demand and supply.
A fund’s NAV depends on whether the investor is willing to buy or sell since it trades on the stock market.
An NAV of Rs. 20 per unit can be sold for Rs. 25 (high price) or even Rs. 18 (low price). This is due to the demand and supply in the stock market.
If the demand is high, an investor can sell for a higher price; if supply is high, the investor gets less than the actual NAV of the fund. But, the actual fund NAV will be different.
Open Ended Funds:
Most common NFO launches of mutual funds are open ended funds. In this type of funds, post launch of the mutual funds into the open trade market from NFO, the fund manager can further accumulate funds and increase the number of units.
Investors can purchase units of a mutual fund before its NAV is allocated, resulting in long-term capital gains. Each unit of a mutual fund must be purchased at the respective NAV once the fund starts operating.
How to Invest in an NFO?
Investing in NFO is not a tedious process. There are two or three ways to invest in the NFO of a mutual fund.
- Through Broker
- AMC Portal
- Online trading brokers.
Investing in NFO through Broker:
When you’ve noticed a New fund offer, you can move to your broker to book the NFO for the estimated fund you are looking to invest. Your broker should be entitled to complete all the processes and formalities related to NFO.
Investment through AMC Portal:
Every AMC has its website. So, you can log in or register using KYC documents; once registered, you can select the NFO scheme and invest your funds.
Invest through Online Brokers:
Online brokers like Upstok, Groww, Zerodha, etc. also sell NFO. You should have an account to invest in NFO through online brokers. If you don’t have an account, you should create one by submitting all the KYC documents.