What is a New Fund Offer?
A new fund offer is the first subscription offering for any new fund offered by an investment company. In a new fund offer the subscription is for a limited period of time, so once the tenure expires you would not be able to purchase units of the scheme at the offer prevailing at that time. Compared to other funds an NFO is cheaper because it is new in the market, the NPOs are very similar to IPOs as investors can purchase shares before they get listed on the exchange.
Sometimes investors seek to invest in mutual funds when the markets are at its peak, desiring it to rise further be it real estate or gold and prefer lucrative investments available at a cheaper rate. The asset management companies or AMCs understand the investor drive and go after seemingly cheaper NFOs and achieve their goal of increasing the asset under management (AUM).
Things to consider when investing in a New Fund Offer
If you are looking to invest in an NFO here is what you need to keep in mind before you invest. To begin with, you need to do a background check on the fund house and its operational history, especially during market volatility. Doing a background check helps you understand how a fund delivers during volatile times and a good track record could mean performance delivered as promised.
The other thing you can check out before you invest in the fund’s objective, the clearer the objective the better you can spell out the asset allocation, risks and expected liquidity among other things. Once the objective is clear you would know how the fund manager will allocate your money. There are many schemes in the market and so the NFO you pick to invest in should have something unique and sustainable to offer. The NFO costs could also be one of the criteria which can determine potential returns. NFOs don’t have a performance history so you may not be able to predict how it’s going to perform in the future. There are some NFOs who charge an exit load on your investment, some come with an investment horizon of 3-5 years which may keep you invested for the long-term.To sum up, you should understand what investors offer and invest only if they offer something unique and you need to ensure your investment horizon and goals are within the time frame of your investments because once you are invested you cannot redeem units until maturity.