Everything You Need to Know About New Fund Offers
Fund houses offer different types of mutual fund schemes to their investors. When a mutual fund launches a new fund, it can raise capital from investors through the New Fund Offer (NFO) period. The money is raised during this period is invested in securities as per the scheme’s objectives.
According to the market regulator, the Securities and Exchange Board of India (SEBI), a new fund can remain open for initial subscription for a maximum of 30 days. Also, the price of one unit i.e. the net asset value (NAV) of the new fund is set at Rs.10 during the NFO period.
After the NFO, investors are allotted units of the funds as per their investment amount
Types of New Fund Offers
Based on the interval, we can broadly categorise funds into two main categories: open-ended funds and closed-ended funds.
As the name suggests, open-ended funds remain open and investors can buy and sell units of the fund anytime. So, in the case of open-ended funds, the funds are re-opened for investment or redemption after the new fund offer. As the fund is open for further investment, the unit price of the fund depends on the value of the underlying securities and purchase or sale of units from the fund.
Investors can invest in close-ended funds during the NFO. After the NFO is closed, it does not allow further investment by investors. The NAV of the fund depends on the units of the funds in circulation and the value of the underlying securities.
What are the differences between NFO and IPO?
Many investors believe that NFOs is like IPOs and rush to invest in NFOs. While the purpose of NFO and IPO is to raise capital, they are not the same. Here are some of the differences between the two:
In an IPO, company shares are offered to the investors, whereas in an NFO, it offers units for the fund to the investors.
The number of shares of the company available for investing in an IPO is limited while there is no such limitation in NFO.
The IPO price is the perceived value of the company. The IPO of a strong company is likely to command better prices in the market after listing. Hence, investing in an IPO of a strong company can lead to higher gains. However, it is not the same in NFOs. It is because the unit price of a mutual fund is Rs.10, and market-level at which investors invest is important.
Should You Invest through an NFO?
During the launch of a mutual fund, fund houses create buzz and hype. Unlike existing open-ended funds, there is no track record for NFOs. Hence, it is important to consider a few factors before investing in a fund during the NFO period.
If the investment strategy of the fund is not unique and there are already several funds in this category, then it will be a better idea to look at existing funds with a proven track record.
However, if the scheme is playing on a new and unique theme and you don’t have exposure in your portfolio, you can invest in the new fund during the new fund offer phase.
Fund house’s track record
As there are no ways to gauge the track record of the new fund, the track record of the fund house becomes important. Consider the performance of existing funds before investing in the new fund through a new fund offer.
Fund manager’s track record
Before investing in a new fund, check the credibility and performance of the funds managed by the same fund manager. We can assume that the new fund is in reliable hands if the fund manager has an attractive track record.
Fund houses launch new funds to further their fund offering. If you are interested in investing in a new fund through the NFO period, you need to keep a few things in your mind such as the investment strategy, track record of the fund manager and fund house. However, if the fund has nothing new to offer and there are several schemes in the category, investing in funds with a proven long-term track record is the better option.