Factors to consider before investing in NFOs

New Fund Offer (NFO) is a method by which an asset management company launches a new scheme/fund to raise money from the public for the very first time. NFO is a concept similar to the IPO of new stock. Investors invest money in the fund and are allotted units after the subscription period is over.

You can apply for a new fund offer only during the NFO period. After the expiry of the period, the fund house comes up with a listing price. This listing price may be at premium or discount or at par with the issue price. We take the example of the Tata Business Cycle Fund to link the facts.

What factors should you consider before investing in NFO?

  • History of the fund house
    Before investing in any fund, always look at the fund house’s history. A history of at least five years is essential to judge the existence and performance of the fund house. Observe and analyse its performance during uptrend and downtrend in the market. In our example, Tata mutual fund is a part of Tata Group and this is enough to understand the history of the fund.
  • The theme of investment
    NFO investments are tied to a theme (i.e., an idea). Theme means the framework of investment. For example, a fund with an infrastructure theme will invest in cement, steel, power, and any other companies related to infrastructure. You can consider investing in such a mutual fund only if the theme is sustainable. In our example, the theme of investment is to gain from the price movements in different business cycles.
  • Asset allocation
    The theme of the NFO mutual fund drives asset allocation. Asset allocation is specified in the fund prospectus. This allocation can be in equity instruments, debt instruments, or hybrid ones. This helps you understand what the fund will do with your money. In our example, it is an equity scheme.
  • Expectations of return
    Understand the fact that any fund house cannot guarantee a specific return. Mutual fund investments are subject to market risks. You can estimate the expected return by analysing asset allocation, investment theme, and risk involved.
  • Risk perceptions

If the theme of investment is risky, the investments to be made by the fund house would be risky. Risk also depends on the goodwill of the issuer. The risk will be lower if a well-known company manages the fund. In our example, the risk is high due to the nature of the investments.

  • Minimum subscription amount
    Investments in NFO can be made through subscription only. Minimum investment can range as per the requirement of the issuer. Generally, the minimum subscription amount ranges between Rs. 500 to Rs. 5,000. In our example, the minimum investment amount is Rs. 5,000.
  • Load structure
    Load structure means the commission charged by the fund house at the time of buying and selling the units. Load at the time of buying is called entry load, and load at the time of redemption is called exit load. In our example, the entry load is NIL, and the exit load is dependent on a few factors.

Opportunities and benefits of NFO

  • You get an opportunity to get exposed to different businesses in which the fund invests
  • If the fund is volatile, you get an opportunity for higher returns, with associated higher risks
  • NFO is an easy method of diversification of risks

Each NFO has its features. If your risk appetite fits within the risk parameters of the NFO, you can consider investing in mutual funds. A better and advisable way to do so is by reaching out to an expert to help guide you in your investment journey.

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