Hello Readers! 

NFO or New Fund Offer, a new mutual fund scheme introduced or launched by a fund house, with the aim to raise capital for purchasing securities. NFO’s functions on the policy of first-come, first-serve basis, hence investor has a limited time period to invest in an NFO.

NFO is open for subscription to a limited period. Earlier the fund house used to roll out NFOs regularly. But after SEBI announced the scheme categorization rules in October 2018, cannot go overboard with new fund offers.

Here the question that every investor eagers to know is where the NFO deploys its inflow? Does it invest everything the next day after your NFO period closes or does it take a few months to build its complete portfolio? Simply how do an NFO works?

So, let us get the answer to this simple question.

For How Long An NFO is Open For Subscription? 

As per SEBI rules and regulations, any NFO can be kept open for a maximum of 15 days from its launch date, for a subscription. If we take this more accurate then, NFO’s of equity mutual funds are open for 15 days. While NFO’s of debt funds, especially those who invest in very short-term fixed income options such as liquid schemes are kept open for a very short period of time, for just about three days or so.

Those investors who take the subscription in NFO’s, they are allotted the mutual fund units within five days after the NFO closes. In case if the units are not allotted within the period, then because of incomplete know-your-client (KYC) norms or mistakes in application forms, your fund house refunds the application money.

For NFO, SEBI has a mandate, that there must be at 20 investors in the scheme, and no single investor account for 25 percent or more of the money invested in the fund.

Where Does Your NFO Invest? 

NFO’s don’t invest all their inflows in one go. In fact, NFO’s are given a period of six months to invest the total amount collected. Portfolio disclosure by the fund house in initial months needs to be analyzed more carefully, to check whether the allocation is in line with the strategy of eth NFO, that was announced with its launch.

While picking up stock to invest, a situation arises where the stock selected by the fund manager is illiquid in nature or the fund manager may expect a correction in the prices of some stocks. That’s why initially, NFO’s invest significantly in arbitrage opportunities initially to ensure the 65 percent threshold investments in equities, to avail equity taxation benefits.

While in the case of NFO’s of Index funds and Fixed Maturity Plan, they deploy their inflows quickly. FOR FMP’s crucial to deploy their inflow at earliest as it buys and holds its underlying instruments till maturity.

Who Should Invest In NFO’s? 

New Fund Offer is a good opportunity to invest if it works or offers a strategy that is not available elsewhere in the MF industry. And if it doesn’t, then generally it is advisable for investors, to avoid NFO’s.

There are investors in the market with two kinds of mindsets, first, the one who considers investing in mutual funds is good, when the market is at its peak, and the others who consider investing in mutual funds, when the market is low, as they will get more units in low price. The asset management companies (AMCs) try to capitalize on this mentality of investors. This is why people tend to go after the less expensive NFOs.

Well, if you plan to invest in NFO’s then you can either transfer your money from your bank account via online mode or you can write a cheque. You can also transfer through a liquid fund or overnight fund.

You can park your money in an overnight or liquid fund and switch to a new fund offer during the closure of the NFO, but remember switching is not free of cost. You might be charged a kind of exit loads for the first six days from the date of allotment of units.

For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee of future returns).