NFO In Mutual Funds – What is it?

I want to share an incident with you,

My friend Arun called me one night to discuss something important. Arun is a dear friend of mine. Being an experienced investor, I was the one who pushed him into investing in Mutual Funds.

We have the habit of discussing silly topics endlessly, one of our favorite topics is Unidentified Flying Objects(UFOs).

He said he wanted to discuss something about UFOs and there was news of a new UFO.

I became very interested and said that every time I used to look into the sky, I pay close attention to find any objects that look similar to UFOs, even though I can’t find one till now!

And how obsessed I have been lately with ordering books about UFOs on Amazon which has become a point of argument between me and my wife, who accuses me of wasting money.

There was a long pause from him…..

And he started laughing hysterically.

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He said. Stop……!

I am talking about “NFO” in Mutual Funds and not “UFO”. It was a new “NFO” and not “UFO”!

We remember and laugh about this incident even today. And I also remember the conversation we had about NFO in Mutual Funds that day.

Some of the questions asked by Arun,

What is NFO in Mutual Fund? Should I invest in NFO of Mutual Fund schemes? Why Agents Push NFO in Mutual Funds? Why The biggest sales pitch for NFO in Mutual Funds is NAV 10? What is the difference between NFO and IPO and Mutual Funds?

I will share with you my insights about NFO in Mutual Funds from the conversation I shared with my friend.

Let’s get started!

Table Of Contents

1.)NFO in Mutual Funds
2.)Process of NFO
3.)The Aftermath
4.)NFO in Mutual Fund – Should I Invest?
5.)Understanding NFO Through Example
6.)The Obverse Fact
7.)NAV 10 in NFO – The Biggest Marketing Strategy!
8.)Understanding Net Asset Value (NAV) Through Example
9.)A Tip to Investors
10.)NFO in Mutual Funds Q&A
11.)Conclusion

1. NFO in Mutual Funds

In simple words, NFO in Mutual Fund means a new Mutual Fund scheme from the Mutual Fund house.

2. Process of NFO

It collects money from many investors and invests in shares and other securities as per the mandate of the scheme.

The NAV of the scheme will change as per the performance of the underlying securities. This offer will be for a short period of say, 30 days, wherein investors can invest in the new fund. Normally, units will be allotted at a price of ₹ 10/- per unit during this NFO period.

3. The Aftermath

After the first set of investors have invested and the portfolio and investor records have been created, the fund opens for ongoing sales.

In an open-ended Mutual Fund, investors can invest either during the NFO period or after that at the prevailing Net Asset Value (NAV).

When the equity markets are performing well, or certain sectors are performing extraordinarily well, you can expect the fund house to launch new schemes to attract customers to it.

4. NFO in Mutual Fund – Should I Invest?

If you want to invest in equities to get a better inflation-adjusted return, it will be better to invest in a Mutual Fund with a good track record.

“A fund in the market which has seen different market cycles and bull and bear markets will be better compared to a new fund”.

5. Understanding NFO Through Example

Suppose you are not well and want to see a doctor. You have 2 options- There are 2 doctors in the city and both are a pass out from the same reputed medical college and

• The first one is a doctor who is just a pass out from medical college and has just now started practicing.
• The second one is experienced and famous in your area and is giving good results for the last 10 years. Though, there may be a slight difference in their fee.

NFOs are the same as in the above example. Even though the new scheme can be from the same fund house, it still has to show the performance to be a reliable investment.

6. The Obverse Fact

There is no guarantee that the old performing Mutual Funds would perform the same way the schemes were giving returns in the past.

It may be true in the case of an experienced doctor, there may be a chance that the medicine does not suit you. But, you will go to the experienced doctor first, Right?

7. NAV 10 in NFO – The Biggest Marketing Strategy!

You can see many Mutual Fund agents recommending new funds and presenting them better than the higher NAV scheme.

If you invest ₹ 10,000 in an NFO, you will get 1000 units.

But, if you invest in a fund with a NAV of 200, you will get only 50 units.

There can be a temptation to get more units like this.

Will the investor who buys a new scheme at an NFO price of ₹10 be better off, than the investor who buys an existing fund at the current NAV‐based price of ₹ 200?

No.

“Both investments represent a share in a portfolio at current market levels”.

8. Understanding Net Asset Value (NAV) Through Example

Let us assume that you have invested ₹ 10,000 in an NFO with a NAV of 10 and got 1000 units.

You have invested another ₹ 10,000 in another fund with an NAV of Rs 200 and got 50 units.

Assume that both the funds had the same portfolio and the return was 20% in that year. At the end of 1 year, the NAV of the new scheme will be 12, and the value of your 1000 units will be ₹ 12,000.

The NAV of the old fund will increase to Rs 240 with a 20% return and the value of your 50 units will be ₹ 12,000.

In both cases, your investment has grown to ₹ 12,000!

There is no way that the ₹ 10 fund will move faster than the ₹ 200 fund if both invest in the same manner at the same time.

9. A Tip to Investors

An existing fund even at ₹200 may be a good investment option if the portfolio objectives meet your needs.

A long-term conservative investor will be better off buying an existing fund at ₹ 200, than buying a risky new fund at ₹10 in an NFO.

“The investor should give importance to the professional management of a scheme instead of lower NAV of any scheme”.

He may get a much higher number of units at a lower NAV, but the scheme may not give higher returns if it is not managed efficiently.

“Several investors fail to see this logic and look at the price per unit, rather than the rate of return”.

10. NFO in Mutual Funds Q&A

i. What is the difference between NFO and Mutual Funds?

The main difference between NFO and Mutual Funds is -NFO is a way to invest in Mutual Funds’ new schemes while Mutual Funds are those instruments in which NFOs are offered.

ii. What are the benefits of NFO?

There are no benefits to investing in NFOs. It is always better to invest in existing performing schemes of Mutual Funds.

iii. Why do agents push NFO in Mutual Funds?

SEBI, the market regulator is of the opinion that if a fund house is having many non-performing funds, such fund houses should not go for further NFO. The distributors normally get higher commissions and incentives by selling NFO. This is one reason why agents push “NFO in Mutual Funds “.

iv. What are the new Mutual Funds to be launched in 2023?

Every Mutual Funds AMC launches different schemes at different times depending on the market situation. You can go to different websites like money control or individual AMC websites to check the upcoming NFOs in 2023.

v. What is the Difference between Mutual Fund NFO and Share IPO?

Let us see, what is difference between IPO and NFO-Initial Public Offer (IPO) of a company denotes the issue of shares of a company for the first time at the time of listing of the company in stock exchanges.

Investors can buy these shares directly from the company at this stage. After that, they can buy the shares from the secondary market through stock exchanges.

Investing in an IPO can help you in investing at the early stages of a growing business which can create good wealth in the long term. Those who have invested in IPOs of companies like HDFC and Infosys made huge gains.

vi. What is a fund manager’s job description and why is it significant?

Executing the specified fund strategy and choosing securities by the fund objective are the responsibilities of the fund manager.

The fund manager, particularly during an NFO, may decide to keep some of your capital in cash and invest them later if the timing is not right for your complete investment.

vii. What steps must I take to invest in a New Fund Offer?

To invest in a mutual fund, a person must have a Permanent Account Number (PAN) and properly complete Know Your Customer (KYC) forms.

The application form for the NFO, which is accessible along with a document called the Key Information Memorandum (KIM), must also be completed and signed to invest in an NFO.

Cheques, NEFT, and RTGS are all accepted forms of payment.

Within five business days following the NFO’s conclusion, investors receive their units, and shortly after, they receive an account statement with all the pertinent information.

11. Conclusion

I think the next time someone asks a question about NFO, you will not confuse it with UFO and would be in a better position to educate him/her about this offer in Mutual Funds.

Jokes apart,

What are your thoughts on NFO in Mutual Funds? Feel free to share!