What Is NFO In Mutual Fund?

What is NFO in mutual fund? How is a mutual fund NFO different from IPO? Is buying NFOs cheaper? This article will try to address such questions in detail.

New fund offerings (NFOs) are somewhat like the IPO of an equity. An NFO is issued either because the AMC wishes to raise funds for the first time or if there is a new category of mutual fund that the AMC does not have exposure in.

What exactly is an NFO or new fund offering?

When a fund house issues units for the first time or raises fresh funds, it will do this through an NFO or new fund offering. A lot of people prefer to invest in an NFO over buying mutual funds from the AMC’s continuous window.

Some people also assume that as long as it’s an NFO, it must be almost identical to an equity IPO issued by companies. This is not correct. As recent times have shown, SEBI has become stricter with its criteria for issuing new investments and AMCs are no longer allowed to offer duplicate investment opportunities under the guise of an NFO.

Read More: Difference Between Direct And Regular Mutual Fund? Which Is Better?

How is a mutual fund NFO different from an IPO?

Investors often conflate an NFO with an IPO, but they are as different as chalk and cheese.

  • An IPO either involves raising fresh funds for the company, or is an offer for sale (OFS). On the other hand, an NFO is for raising fresh funds and has no limit on how much can be raised.
  • Secondly, company IPOs have different quotas for retail investors and non-institutional investors. In some cases, an IPO also offers a discount to retail investors. However, there are no such special benefits in case of a mutual fund NFO.
  • With an IPO, the critical aspect of valuation is based on P/E ratio, EV/EBITDA ratio, and P/BV ratio. These determine the IPO price. With an NFO, there is no question of valuations since the amount collected is simply divided into units and invested in the market without a set price.
  • IPO: Money has a lot of significance in an IPO because it determines whether the money will add any benefits to the investors or not. In an NFO, what really matters is the level of the market because that impacts at which valuation they will invest.
  • The IPO price is an accurate reflection of the perceived value of the company. This means that better-quality IPOs will command a higher valuation. When it comes to NFOs, the majority of fund NFOs come out at a price of Rs.10, but this is just a starting point. What’s important is the level they enter the market when they go public
  • IPOs can either list at a premium to the issue price or at a discount, depending on demand, market conditions and any relevant news. However, NFOs have marketing and administrative fees debited from their NAV, so they usually open at a discounted price
  • When evaluating IPO price, investors take into account a number of factors such as supply and demand. A number range is specified, but the actual price will be discovered through book building during the NFO. The NFO affects the valuation of the company but does not represent supply or demand.

Read More: Equity Mutual Funds – Types, Benefits, Taxation

Who launches IPOs, and who launches NFOs

There are two types of IPOs. There is a fresh issue, in which the company raises new funds in the market and then there is an offer-for-sale, in which promoters or early investors offload their stake through the IPO. In the case of an offer-for-sale, share capital remains unchanged, as does the company’s listing.

New Fund Offerings (NFOs) are made by mutual fund houses or AMCs. Their goal is to promote a new investment idea within the market. NFOs often happen at times of economic prosperity, but after SEBI passed the new MF regulations on categorization of funds, NFO ideas might be constrained going forward. AMCs can also use marketing New Fund Offerings as a way to supplement their fund offerings.

Are there any similarities between an IPO and an NFO?

IPOs and NFOs both raise money from the public but there are differences. An IPO must stay open for three days, for example, but an NFO can stay open for a little over two weeks. Although IPOs involve marketing costs and more administrative ones like compliance and legal, NFOs also have these same expenses.

First, both IPO and an NFO tend to happen during periods of high growth and solid stock market returns. Both the NFOs and IPOs are regulated by SEBI which covers all aspects of both, from the filing of the prospectus to monitoring the allocation of funds.

Is buying NFOs is cheaper than buying units from the continuous window?

It is not true that an NFO always entails a higher cost. In fact, an NFO can actually lower your cost in the long run by being more targeted with distribution and marketing. When a mutual fund comes out with an NFO, it has to spend heavily on marketing, publicity, and distribution. This typically leads to higher costs of advertising, publishing pamphlets, printing forms, and attending broker meets across the country.

Most mutual fund exchanges will demand upfront fees from you and may also charge fees on a regular basis as you continue to hold the NFO. All these fees are debited to the Net Asset Value (NAV), which will invariably lead to the fund being listed at a discounted price. With continuous trading, you have the option between Direct Plans or Regular Plans. The latter is two or three times cheaper on average than those in the first category.

Is it true that NFOs are attractive being always available at Rs.10?

This is not true. When it comes to a mutual fund, the net asset value or the NAV is just indicative of the unit value of the underlying portfolio of the fund. For an equity NFO, when The Nifty P/E at 30 times and NFO comes out, then with existing funds will purchase stocks only at these valuations. It does not matter what is the issue value of an NFO

Investing at a low NAV is problematic when your stocks are selling at a significant premium. If the Nifty index is trading at 14 times trailing P/E, investing in mutual fund shares on secondary markets is a great idea. Buying a mutual fund NFO at 10 times par value if the Nifty index sells at 29 times average earnings however, will not serve you well. What matters is the quality of the underlying portfolio, not the par value of the fund.

Check SEBI website for Mutual Fund Filings


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