What exactly is an NFO?
When an Asset Management Company (AMC) creates a new mutual fund in the market, it can obtain capital for it by issuing a statement to investors about a New Fund Offering.
An NFO, like an IPO, comprises portfolio specifics such as firm shares to be purchased, fund management details, and the sorts of securities to be procured, among other things.
Recognizing the New Fund Offering
An NFO may be active in the market for a maximum of 30 days, according to SEBI norms. During this time, each unit of the fund will be available at the subscription fee.
After the limited period expires and the NFO closes, the funds will be traded in the market like any other mutual fund — at their Net Asset Value (NAV). Because NFO fund units are inexpensive, investors can reap massive financial gains once the funds begin trading on the open market.
5 Things to Think About Before Investing in an NFO
- The Scheme’s Investment Theme
Begin by learning about the mutual fund scheme’s investment theme. Every NFO outlines in its Scheme Information Document (SID) what it hopes to achieve (high returns, capital appreciation, etc.) and how it intends to do it. To address the ‘how’ issue, look at how the scheme intends to distribute its assets, whether it will be an equity-oriented scheme, invest primarily in debt and money market instruments, or take a hybrid approach.
- The Fund House’s Track Record
Another key thing to evaluate is the fund house’s track record and market repute. You may do this by looking at how long the fund company has been in business, how many mutual fund schemes it now offers, and how well these schemes have performed.
It is safer to invest in the NFOs of established fund houses rather than newly founded fund houses. However, it should not be the main criterion for selecting or not selecting a specific fund house. In India, there are numerous newly founded fund institutions that offer fewer but higher-performing plans.
- The Fund Manager’s Track Record
Knowing the track record of the fund manager is just as important as knowing the track record of the AMC since the fund manager is ultimately in charge of your money invested in the scheme. You can examine a fund manager’s track record by looking at the performance of the schemes he currently manages, the performance of the schemes he previously handled, or his total number of work experience in the mutual fund sector.
- Expenses associated with the Scheme
Investors are frequently led away by the appealing NFO pricing, which is typically as little as Rs. 10, and fail to consider the costs involved with an NFO. It is critical to examine the associated costs such as the Entry Load, Exit Load, and so on. Some fund companies charge an exit fee if an investment is redeemed before a particular time period. Before investing in any financial instrument, it is always vital to be informed of the associated charges.
- Implications for Taxation
Mutual fund earnings are divided into two categories: dividends and capital gains. While dividend earnings are subject to a Dividend Distribution Tax (DDT), which is withheld by the fund house from the dividend given to you at a rate of 10%, capital gains are taxable in the investor’s hands. The tax treatment of capital gains varies depending on the type of mutual fund.