NFO New Fund Offer | Meaning, Understand NFO & IPO
What is NFO?
When an asset management company launches a new fund, it first opens it for subscription for a few days. This process is called NFO or New Fund Offer.
The NFO is carried out to raise funds for the fund, before purchasing the fund manager’s stocks and creating the fund’s investment portfolio.
Now as per SEBI rules, the duration of an NFO cannot be more than 15 days.
After the end of the NFO period – most funds turn into open-ended funds. Which means that now these funds can accept new money or investment in the fund.
Usually an NFO is constructed in this way. And with that we come to one of the important reasons that you should consider.
Is the fund being offered in NFO – an open-ended fund or a closed-end fund?
Remember, we said that open-ended funds are schemes in which new investments can be made.
A close ended scheme is exactly the opposite and NFO is a time when you can invest in it. So if the fund offering is close-ended, then you can consider investing in NFO.
But if the fund offering is for an open-ended scheme then stop and listen to some important things about which we came to know in our research.
Most people, including me and you, invest in the fund only after looking at the track record of the fund.
Usually we decide to invest in a fund, after looking at its 1-year performance, 3-year performance, its rating, ranking, comparison with other funds, fund portfolio, etc.
Now the fund launched through NFO is brand new and there is no old information about its performance, no portfolio of assets, no ranking, no rating, no experience.
And talking about without experience, there is another confusion here. In 2018, SEBI i.e. Security and Exchange Board of India, made it mandatory for AMCs to launch only one fund per category.
Prior to 2018, some mutual fund companies had 3 large cap funds, 4 multicap funds and so on, which misled investors.
But now it is all over. A mutual company can have only one scheme per category. So 1 large cap, 1 multicap, 1 midcap, 1 multi-asset fund etc.
Which means that if a mutual fund is launching an NFO, it means that they have no experience in this category.
Think about it, the category itself is quite new for fund houses. And it may be that the fund manager takes some time to work out his investment strategy.
And although I like the concept of learning, it would be better if the fund manager learns from someone else’s money and not from my money.
Our suggestion here is quite simple. If the fund is launching in a category that already has many funds – then choose the fund that has a track record.
For example, there are 25 schemes in the midcap category from which you can choose. 18 of these 25 schemes are more than 10 years old.
There is so much experience and old information that you can use, instead of choosing a new fund offer, to decide which fund to invest in.
In other words, think and understand before doing anything.
If you have ever heard someone say “NFO is like IPO”, please think seriously about my suggestion and do not take any kind of financial suggestion from that person.
Thousands of people have the illusion that NFO and IPO are the same thing.
So what is an IPO?
An IPO or initial public offering is a process in which the promoters of a company offload a limited number of shares for the public to buy.
Notice what I said here. The promoters of a company offload a “limited amount of shares” for purchase.
This means that the volume of shares in an IPO is limited and the IPO is only a fixed amount of ownership transfer from the promoter to retail investors like you and me.
This is not the case with open-ended NFO and unlike the limited-holding company, the units offered in open-ended mutual funds continue to grow when there is more investment or new money.
So consider an IPO like Mumbai where land is limited due to geographical location but NFO is like Delhi which keeps finding new land and keeps growing.
The point is simple – IPO and NFO are not the same and these are two completely different things every scheme management charges.
This fee helps AMCs to better manage your money by appointing fund managers, paying analysts, buying and selling securities and many other things.
These charges are also called the expense ratio of the fund and are usually charged as a percentage of AUM or Assets Under Management.
Mutual fund rules in India now allow funds with smaller AUM to have higher expense ratios than funds with larger AUM.
These tables show the maximum expense ratio valid according to the rules. And we can see how as the fund grows, the spending structure is getting smaller.
Now most of the NFOs raise up to 500 crores which means that these funds can charge around 2% in expenses. However, the expense ratio of established funds with more than 20,000 crore AUM is very low.
Which means, more generally, NFO than an established fund Funds can charge you more than you would not like at all because if everything is the same – a lower expense ratio is better than a higher expense ratio.
On the issue of NFOs being expensive, we got an exception to this rule. When the Central Public Sector Enterprise Exchange Traded Fund or CPSE ETF first came in March 2014
So its offer was unique – a 5% discount and the trend continues in future trenches, with a 3 to 5% discount on every CPSE ETF trench to make the offer more attractive to retail investors.
But this is the exception and most NFOs do not give such exemption.
It is shocking how many investors consider this absurd concept to be true that NFO is a great deal as it is available for Rs 10 whereas most of the NAVs of established funds come in Rs 200 or Rs 300.
This is not true at all.
The money you make from mutual funds depends not on the overall cost of the NAV but on the relative growth in the NAV. For example – it is quite possible that the fund you bought on NAV of 10 may increase from 10% to 11.
And the NAV fund of Rs 200 may increase by 20% to Rs 240.
A 20% increase in NAV would be much more beneficial for you than a 10% increase in NAV.
And this clearly shows that the performance of the mutual fund is related to the NAV on which you bought it and it has nothing to do with the overall price of the NAV.
Let me remind you again that NFOs are marketing tools and marketers will do everything to convince you to invest. So understand, learn and then act.
Well, for mutual fund companies, an NFO means a new fund offer but on ETMONEY, NFO is like never getting one, because NFOs are nothing but arrows in the dark.
You can invest in NFO if it has something to offer which is completely new to the market and you really trust it.
For example – there is a fund type called a quant fund that usually chooses stocks based on algorithms, mathematical models and machine learning
Therefore technically, the stocks of such funds are not selected by the human fund manager, but are chosen by computer.
These funds are quite popular all over the world but they are not yet established in India.
Now, there are hardly 2-3 quant funds in India and most of them are only 1 year old, so if a quant fund’s NFO comes then you can think about it.
However, we would still suggest that you look at the performance for a few months before investing in it.
But when it comes to mainstream categories such as largecap, multicap, ELSS etc., it is better to choose an existing scheme that has a proven track record rather than something new or unexpected.
NFO New Fund Offer | Meaning, Understand NFO & IPO