Introduction
The new investment landscape saw an update. The New Fund Offerings would no doubt find great investors for those having newfound avenues into investments.
One of the pillars of mutual funds is the NFO. For the investing public, it has brought in new issues whose portfolios, strategy, and investment targets constitute fresh opportunity, which would not have surfaced had this development never occurred.
This article discusses NFO in detail, ranging from the kind of NFOs to benefits and disadvantages to comparisons with another popular financial product like an equity IPO and includes some of the upcoming NFOs of 2025 which would provide the best opportunity to invest.
By the end of this article you would have had a clear picture of NFOs, how they work and their potential in terms of being a good buy or a dodgy investment based on the factors mentioned above.
NFOs in the Indian mutual fund industry
What is a New Fund Offering?
NFO is an abbreviation of New Fund Offering, under which a new mutual fund is available for public subscription for a definite time.
In simple words, this is just like an IPO of the stock market. An NFO provides units of a newly launched fund with the investors for a definite time usually for ₹10.
In actuality, when the subscription period to issue NFO’s expires, fund units are available to the investors;
thereafter, they are tradeable in the markets. A specified amount of money is then raised by the fund that needs to be invested across the assets decided to be acquired equities or bonds as per the area of focus of an NFO fund.
NFOs enable an investor to enter a mutual fund at the time of its launch so that the investors can share its growth process right from day one.
Types of New Fund Offerings (NFOs)
The NFO can be broadly categorized in respect of the kind of investment strategy and type that they make use of. These are as follows:
1. Equity NFOs
General equity NFOs in common invest into the equities.
That category of funds could hold some specialized investment mandate like putting only money to the large-cap, mid cap or small-cap stock or the fund can focus to particular sectors or industries.
More suitable for an equity NFO to those investors who have stronger risk appetite and seek a more return in the long term.
• Sectoral Equity NFOs: Sectoral equity NFOs are those funds which invest in stocks of a particular sector or industry, like technology, healthcare, or energy.
• Thematic Equity NFOs: These funds focus on a particular investment theme, like sustainability, automation, or infrastructure.
2. Debt NFOs
Mainly investing in fixed-income instruments, debt NFOs mostly include bonds, debentures, and any other debt-based instruments.
Generally, such investments are best for conservative investors wanting steady income at a relatively less risk compared with equity investments. They can be subdivided into:
• Short Term Debt NFOs: Investing in short term debt instruments- commercial papers and treasury bills.
• Long term debt NFOs: Invests in long-term debt instruments of corporate bonds as well as government securities.
3. Hybrid NFOs
Hybrid NFOs usually invest in the mix of equity and debt. Hybrid NFOs provide investment with a relatively balanced approach, balancing risk vs. return;
as they provide exposure to growth possibility through equities at the same time providing stability associated with debt, and hybrid fund can be categorized based upon equity-debt allocation as per following heads of:
• Balanced Hybrid Funds: Invest equally in large cap equities and a debt instrument.
• Aggressive Hybrid Funds: More aggressive in equities for better growth.
• Conservative Hybrid Funds: More investment is made in the direction of the debt to lower risk.
4. Index NFOs
Index NFOs track the performance of a particular index market, say, Nifty 50 or Sensex.
Funds invest in stocks that make the index, the same proportion in which they have been made by the index itself, and promise to replicate its performance.
In comparison, an index fund enjoys lesser expense ratios; hence, such funds are meant for long term passive investors.
5. NFOs of ETFs
ETFs are very much similar in nature to index funds but are traded in the exchange like any other regular stock.
A fund which is referred as NFO or newly opened fund. It gives its investors exposure to the basket of assets as a single package.
One advantage it has more than a regular mutual fund is that it offers more liquidity; hence, these are aptly suited for trading in and out of it.
6. FoF- NFO
Funds NFOs do not invest directly in the equity or debt or bonds. Rather, the money is pooled into another fund for investment.
Therefore, it works as diversifying funds into a portfolio, possibly of equity, debt, or hybrid funds.
It’s through the mechanism by which the investor would be getting exposure to different sets of fund managers and thereby reaping a diversified portfolio.
Benefits of New Fund Offerings (NFOs)
Investment in an NFO gives many benefits. It is quite an attractive option for some of the investors and has many reasons to be that way. It includes the following benefits:
1. Chance to Invest at the Launch Stage
This happens to be an NFO-based investment opportunity, which entitles one to participate in the fund just from the very inception.
Early investors of an NFO can take the growth potential of the fund over time into its mature period.
2. Low Entry Price
NFOs charge at a nominal fee (₹10 per unit) and have therefore always remained cheaper to invest with.
To put it differently, an entry fee so low has enabled investment opportunity with this brand-new fund at a very much lesser amount as compared to the available investments elsewhere.
3. Diversification
Many NFOs, especially hybrid and multi-asset funds, offer diversification by investing in multiple asset classes.
This reduces the general risk of a particular investment as the fund cannot rely on returns from one type of asset class.
4. Diversification of Investment Options
NFOs are available in various types, such as equity, debt, hybrid, and index-based.
This way, different investors can then select a preferred mix that best suits them in terms of their risk and investment goal.
In this manner, they can invest in funds that are at different levels of risk but range from the low-risk debt funds to the very high-risk equity funds.
5. Possible High Returns
While riskier, equity-based NFOs, especially sectoral and thematic funds, are expected to be high return-yielding, especially if they are well-positioned in emerging industries or themes.
If the strategy of the fund manager will work, tremendous capital appreciation for early investors awaits.
Disadvantages of New Fund Offerings (NFOs)
Despite this, NFOs have their own cons which the investor needs to keep in mind before parting with the money:
1. Lack of Track Record
Since NFOs are a new category, there is no record of past performance. Hence, it would be difficult to determine how the fund will perform under different market conditions.
Compared with existing funds, NFOs do not have a proven track record of returns and are therefore inherently riskier.
2. Market Volatility
The equity-based NFO is very susceptible to market risk, and these products tend to be very volatile in general, especially if invested in emerging sectors or themes.
It is going to depend heavily on the market for performance, and it may even lag in certain periods of time, at least during the initial years 3. Lower Initial Capital
3. Limited Initial Capital
NFOs tend to raise a huge amount of money at the time of launch but after the subscription period is over, the fund may not attract much new capital.
That could lead to liquidity problems in the future when investors wish to redeem their units.
4. High Fees
Some NFOs may command a higher fee as compared to available mutual funds.
Chances are, that will only serve as a hole in the profits of an investor if such fund does not obtain the perceived performance.
5. Overhyping Opportunities
Many NFOs are launched with high marketing campaigns and expectations.
This often gives a feeling of urgency among the investors to invest quickly without really understanding the risk involved.
When the fund fails to live up to the expectation, then there is a disappointed return for investors.
NFOs in 2025
There would be multiple NFOs that would come before 2025. Here, these funds would give multiple avenues of investment across multiple sectors, asset classes, and styles.
It is not known what all the details will be, but a few that will probably come are:
• Sectoral Funds focused on emerging technologies like artificial intelligence, renewable energy.
• Thematic Funds that would focus more on sustainable investment opportunities aligned with the trends across the globe to invest in ESG investing.
• Balanced Advantage Funds which dynamically allocates between equity and debt to maximize the risk-adjusted returns.
NFO would look out for such NFOs in 2025 since it may give them some interesting investment opportunities.
NFO vs. Equity IPO
New Fund Offerings as well as Equity Initial Public Offers of presenting the same new investment avenues for the investor,
they are very different from each other in their nature, risks, and expected return:
• NFOs: These are a type of mutual funds that permit investment in the units of a newly introduced fund. Such a fund may invest in assets such as equities, debt, and others. NFOs offer diversification and are professionally managed by the fund manager.
• Stock Market IPOs: This refers to issues of shares on the stock exchange where, for the first time, a firm raises capital by issuing shares to the public.
It implies that the investors will be able to buy into the company and thus own a percentage of that company.
It carries with it a pretty big risk but promises an immense return if the firm does well in the market.
The basic difference is that NFOs offer diversification and fund managers operate them, while through IPOs, an investor is directly exposed to the company’s performance,
thus more at risk as an individual.
Conclusion
NFOs are an essential component of the mutual fund industry, which enables an investor to invest in a newly launched fund for probable high returns.
Differently categorized types, like equity to debt and hybrid NFOs, exist with respect to investments;
thus, they create an overall basket of choices available to an investor.
Inevitably, these also come with its set of demerits- track record nil and hefty charges associated with probable high volatility of market conditions.
Investors have to pass on the comparison of advantages and disadvantages and notice whether investments undertaken through an NFO align with their monetary needs and the risk tolerance capacity.
Only such comparison facilitates investors in determining what will serve better, be it the mode of investment that is known as NFO or other various available modes, such as equity IPO for instance.
With knowledge of clearly NFOs and the landscape in which it sits, better decision-making allows the investor to potentially garner value in early exposure to exciting opportunities to invest into in 2025 and beyond
Frequently Asked Questions
1. Is it good to invest in new NFO mutual funds?
Investing in new NFO mutual funds can be good, but depends on the strategy of the specific fund, the asset allocation, and the risk profile of the investor.
The better part of NFOs is early entry at a nominal price, but it also carries risks: lack of track record and market volatility.
Therefore, before investing, the objective of the fund, investment style, and expertise of the manager need to be weighed with caution.
It can form a good opportunity if the NFO meets your financial goals and risk tolerance, but caution is recommended.
2. How to analyze NFO?
Following steps are to be performed for analysing an NFO:
o Fund Objective: The fund house’s investment mandate in equity, debt, hybrid, etc. and how it Molds your investment goals.
o Fund Manager: Check the track record of the fund manager and the fund house. The manager’s competence indeed plays a pivotal role in the fund’s performance.
o Asset Allocation: Determine how the fund is allocating its investments (equity, debt, sectors, etc.). Should correlate with the risk tolerance.
o Expense Ratio: Consider the cost construct, especially the expense ratio; high fees will also eat away at returns over a long-term period.
o Risk Profile: That it holds a certain kind of risk for the investor. An equity-based NFO will, therefore, be much riskier than a debt-based NFO.
o Investment Horizon: Whether the NFO strategy is in-line with your investment horizon (short term or long term).
o Peer Comparison: Whether the NFO has a similar performance, expense ratio, and strategy compared to existing peer funds.
3. How do you make money from NFO?
You primarily make money through an NFO:
o Capital Appreciation: If your NFO has invested in equities or any other growth instruments, the sum of your investment will appreciate with more assets in the fund appreciating.
o Dividends: NFOs, where the investments have been made into dividend-paying equities or bonds, offer periodic dividends.
o Interest: If there are NFOs where the investments made in the portfolio are on debt papers, you would receive money from interest income derived from the bond portfolio and other papers on debt.
o Redemption Gains: If your NFO works out to be a successful investment and NAV of the respective scheme increases, then you may sell your units at a better price than that for which you purchased them.
4. How does the NFO allotment work?
An NFO allots the following process: When the subscription period is over, the fund house collects all applications and gives the respective investors the units they would be allotted, according to the investment amounts.
As a general rule, an NFO is priced based on a face value. Face value usually amounts to ₹10 per unit.
If the total demand exceeds units available, there is allotment on a pro rata basis as well, but investors would just get a fraction of the units as applied for by them.
NFO units after allotment become credited in either the demat or the account of mutual funds, and at this stage itself, the NFO begins making investments in pursuance with its investment plan.
5. Is NFO subject to some lock-in period?
Some NFOs have a lock-in period, though this depends on the type of fund:
No Equity Linked Savings Schemes (ELSS): Such forms of NFOs are under Section 80C and thus give some tax benefits.
Generally, these NFOs carry a lock-in period of minimum 3 years.
Other NFOs: All other NFO’s (non ELSS) do not have a lock-in period.
Their units can be redeemed at any point of time, though certain early exit load (a charge) may apply in case redeems within specified period of time, usually 1-3 years.