• HDFC
• 26 Apr 2018
• MF Product

HDFC, Tester

What Is A Mutual Fund NFO?

In the stock markets, you have IPOs or initial public offers, where companies offer their shares to investors for the first time. Similarly, mutual funds have NFOs or New Fund Offers. But the two are different in fundamental ways. We will come to that in a bit. But, first things first.What is a mutual fund NFO?

 

A New Fund Offer(NFO) is the first time a mutual fund scheme offers its units to the public. A mutual fund uses the NFO to raise funds for its scheme by allotting units of equal value (usually Rs 10) to investors. For example, if you invest Rs 10,000 in an NFO, you will receive 1000 units of Rs 10 each.

 

After the NFO is closed, the mutual fund invests the corpus raised from investors in the markets based on the scheme’s objectives and investing style. The price or Net Asset Value (which is Rs 10 at the start) of the fund rises and falls based on its performance.

 

How is an NFO different from an IPO?

The fundamental difference between the two is that the pricing of an IPO is based initially on what the company considers fair value for its share, and then market forces such as demand and supply determine its listing price. An IPO goes through a process of price discovery.

 

The price of an NFO is usually set at Rs 10. But it could have been set at Re 1 or Rs 100,and it wouldn’t have made a difference to an investor. At Re 1, investors would have got more units, at Rs 100 fewer units. The price of the fund after listingfluctuates based on the performance of its portfolio and has nothing to do with demand and supply.

 

Should I invest in an NFO?

Typically, new funds have higher expenses and no track record of performance. You will usually be able to find a more established fund for your needs. But there may be a case for investing in NFOs under some circumstances.

 

New way of investing: Is the NFO offering a new investment idea or thought that is in line with your objectives? Is it tapping a niche that is not currently covered by the market? A unique proposition is something you could buy into.

 

Different portfolio: Is the fund giving you access to new asset classes or investments? Does it allow you to diversify your risk or add to your returns in ways that are not currently possible? The best way to understand this is to read the prospectus. This document will list the type of securities the fund plans to invest in, returns expected and investment rationale

 

Lower expenses: NFOs of Exchange Traded Funds (ETFs) or passively managed funds sometimes offer a good reason to buy. ETFs usually track an index such as the Nifty or the price of gold. A new scheme may track an index or commodity that is currently not covered,or it may promise a lower expense ratio.

 

Closed-ended funds: These are funds that come with a lock-in period of 3 to 5 years and can usually be bought only during the initial offer. If you find a closed-ended NFO that fits your needs, you could opt for it.

 

NFOs are worth investing if they offer you something innovative that enhances your portfolio.