New Fund offers are floated by mutual fund companies to raise funds from the public for investing in bonds and stocks. These are the first-time subscription offer in respect of a new scheme. More precisely stating, it is an invitation extended to investors to subscribe to the units of a newly launched fund.
For the NFO, minimum investment amount is generally Rs. 5000 and investors can purchase the units under the new scheme at a fixed price of Rs. 10 for each unit. In case of a closed-ended scheme, the mutual fund house does not entertain the application request once the NFO period is over. On the other hand, in case of open-ended funds, subscription to the units as well as their selling is an ongoing process that continues even after the initial NFO period. Generally, NFOs come with a lock-in period of three years.
Mutual fund house coming up with a NFO shall put forth the investment objective. The NFO offer can be based around any of these themes , including economic recovery, capital protection, growth, infrastructure, equity opportunities etc. The approval of SEBI is required before launching the NFO.
Factors to be considered before subscribing to NFO
Growth rate of NAV is what matters
Some investors are lured to invest during the new fund offer period as the units are available at a lower fixed price of Rs. 10 per unit. Instead, investors should thoroughly understand and analyse the new scheme. And the growth of the fund shall to a large extent depend on the quality of the financial instruments such as bonds or stocks which form the part of the funds investment.
The draft prospectus of the NFO enlist the objective of the new fund offer, the risk profile as well as expenses. Expenses including recurring ones such as initial expenses per se issue, loads etc should be judged. These expenses reduce the return by a considerable amount so they need to be evaluated carefully.
Investment policy or style of the new fund shall also be studied
Investment style or policy of the fund will provide a clear picture of the sector or stocks in which the fund shall invest. Scheme-specific factors should also be given due consideration. Risk in respect of limited diversification such as more investment in a particular stock or sector or in a specific capitalization such as small-mid cap should also be factored in.
Past performance of the AMC and fund manager:
It's necessary to consider the history of the AMC that is launching the NFO and if it is deviating from its investment style then the scenario likely reflects weakness of the fund. Funds which are being managed by the AMC should be checked with them together with their performance. The qualification as well as experience of fund manager also comes into play when we talk about the performance of the fund. If not assessed carefully, subscription to NFOs can prove risky.