NFO stands for a New Fund Offer.
A nfo means a new fund from a mutual fund house which was
not available earlier.
With growing acceptance of mutual funds as a form of
investment, mutual fund houses periodically introduce new fund offers so as to
complete their basket of investments available for investors.
A NFO is usually what results in the beginning of a mutual
fund scheme.
Other reasons being merger of schemes within the same fund
house or merger or acquisition of two or more fund houses, these are rare
instances though.
NFO
meaning
A nfo or a new fund offer is a method by which a mutual fund
scheme raises the initial investment into the fund.
The new fund offer is available for purchase for a limited
number of days only.
After which it becomes unavailable for fresh purchase or
redemption for a couple of days.
Once this time duration is complete, the nfo no more remains
a nfo and is treated like any other open ended mutual fund scheme.
In which you can invest and redeem as and when you please,
considering it is an open ended fund and you comply with the necessary exit
load calculations.
Types
of New fund Offers (NFO’s)
NFO’s can be categorized as open ended or close ended
Open ended
Open ended nfo’s are those funds where once the nfo period
is over, the fund becomes an open ended fund.
Anyone can invest and redeem as and when they wish.
Those who invested during the nfo period can also redeem
once the nfo period is over.
Close ended
In a close ended scheme once the nfo period is over, one
cannot invest or redeem as per their own wish.
The fund usually becomes close ended for 3 to 5 years, 3
years usually.
As far as possible, it is better to avoid a nfo mutual fund
that is close ended.
This is because historically such funds have more often than
not fetched extremely poor returns and the reason for that is actually quite
simple.
Since no one can redeem for 3 to 5 years, there is not much
pressure on the fund manager to perform.
Even if the fund underperforms, investors cannot shift their
investment to another mutual fund scheme.
Therefore the fund is assured of the investment amount till
the expiry period.
This is not always the case but mostly so with close ended
funds, elss or tax saving funds funds being an exception.
In an open ended fund, both the fund manager as well as the
fund house in under pressure to perform since constant underperformance can
result in redemptions.
Features
of a nfo
An equity nfo can be kept open for a maximum of 15 days.
Debt funds and liquid fund nfos are kept open for an even
shorter time, 3 days or so.
The amount collected in a nfo mutual fund has to be invested
within 6 months.
Most nfo’s do not wait that long and invest the complete
amount much before the 6 month time period with exceptions.
Units are generally allotted within 5 days after the nfo
mutual fund is closed.
If your new fund offer application is rejected due to
incomplete kyc or incorrect details provided then the amount is credited back
to you.
Every nfo mutual fund has to declare before hand the minimum
invested amount as well as the asset allocation and investing style among other
things.
Timing
of a NFO
Historically and numerically speaking, most nfo’s have been
launched during market buoyancy.
This makes sense since there is a feeling of euphoria when
the markets are on a high.
It is easier to collect money and gain investors trust
during market highs than during market lows.
Therefore it should not come as a surprise that most nfo’s
are launched during market highs.
In fact with the markets being on a bull run in 2021, 5
nfo’s are being launched within a space of ten days.
|
Scheme |
Launch date |
|
Trust Short
Term Fund |
20th
July 2021 |
|
Nippon India
Flexi Cap Fund |
26th
July 2021 |
|
IDFC US
Equity Fund of Fund |
29th
July 2021 |
|
Mahindra Manulife
Flexi Cap Fund |
30th
July 2021 |
|
SBI FMP
Series 48 |
30th
July 2021 |
Another point of influence with a nfo mutual fund is the
acceptance and demand of a particular theme or style of investing during a
particular period.
For example, look at the launch of the following IT based
mutual fund schemes.
|
Scheme |
Launch date |
|
Birla Sunlife
Digital India Fund |
Jan 2000 |
|
Franklin
India Technology Fund |
Aug 1998 |
|
ICICI Prudential Technology Fund |
Mar 2000 |
|
SBI
Technology Opportunities Fund |
July 1999 |
The
reason for all these Funds being launched between 1998 and 2000 is because this
was supposed to be the time of the IT boom in India.
The
IT sector in 1998 contributed 1.2% to India’s GDP. The TIDEL Park, the then
largest IT park in Asia was opened in the year 2000.
The
Information Technology Act was also passed in the year 2000 which paved the way
for legal procedures for electronics transactions and e-commerce.
All
of the above factors did help in creating a positive market environment for the
IT sector to boom and various AMC’s were not going to be left behind to milk
this.
This
therefore led to the launch of several IT based Mutual Fund Schemes in the
space of just 2 years.
We have thus seen how the positive scenario around one particular sector helped in driving investors towards a particular Mutual Fund Scheme.
Now
let’s look for an example where a beaten down sector allows for business to
thrive in a particular sector driven Mutual Fund scheme.
|
Scheme |
Launch date |
|
DSP
Healthcare Fund |
Nov 2018 |
|
ICICI Pharma
Healthcare & Diagnostics Fund |
July 2018 |
|
IDBI
Healthcare Fund |
Feb 2019 |
|
Mirae Asset
Healthcare Fund |
July 2018 |
All of the above mentioned schemes were launched
within a space of just 8 months.
The reason for this is that the Pharmaceutical
sector as a whole was down, this therefore paved the way to build up a
consensus that the past is behind us and things will only get better from here
on.
As mentioned above, the timing of the launch of
these types of schemes is very much dependent on the narrative that one wishes
to believe.
After the market crash of March 2020, there was a growing
clamour and acceptance of international mutual funds.
Mutual fund houses were quick to cash in on this new demand
and this led to a surge of international nfo’s.
|
Scheme |
Launch date |
|
Edelweiss US Technology Equity FoF |
Mar 2020 |
|
Motilal Oswal
S&P 500 Index |
April 2020 |
|
Axis Global
Equity Alpha FOF |
Sept 2020 |
|
Invesco India – Invesco Global Consumer Trends FOF |
Dec 2020 |
|
Kotak
International REIT FOF |
Dec 2020 |
|
Kotak Nasdaq
100 FOF |
Feb 2021 |
|
Axis Greater
China Equity FOF |
Feb 2021 |
|
HSBC Global Equity Climate Change FOF |
Mar 2021 |
|
SBI International Access – US Equity FOF |
Mar 2021 |
|
Mirae Asset
NYSE FANG + ETF |
May 2021 |
|
BNP Paribas
Funds Aqua FOF |
May 2021 |
|
Mirae Asset
NYSE FANG + ETF FOF |
May 2021 |
|
Axis Global
Innovation FOF |
May 2021 |
|
Kotak Global
Innovation FOF |
July 2021 |
Earlier mutual fund houses could come out with as many nfo’s
as they wanted.
Since 2018 though, a mutual fund house cannot have more than
two funds in the same category for equity funds except for thematic and
sectoral funds.
The narrative set for every nfo mutual fund should be viewed with scepticism.
A nfo will claim that:
It can solve a problem that you have.
Open your eyes to a problem you are having but haven’t
realized yet.
Add something of value to your mutual fund portfolio or
Try to influence your decision by FOMO (fear of missing
out).
Should you invest in a nfo?
You can consider it if:
The new fund offer is a category of fund that does not exist in your mutual fund portfolio.
If it is going to be a part of your satellite portfolio.
If it adds a unique touch to your mutual fund portfolio.
If you understand the functioning, objectives and risks
attached with the new fund offer.
The nfo mutual fund is aligned with your risk profile.
You should avoid it if:
The new fund offer is not going to add anything of unique
significance to your mutual fund portfolio.
If the nfo is going to be a part of your core portfolio.
If the only reason you are investing is due to FOMO (Fear of
missing out).
If you do not understand the investment style and risks
attached with the nfo.
The nfo mutual fund is not aligned with your risk profile.
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com
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