A New Fund Offer (NFO) is the first time subscription offer for a new mutual fund scheme launched by an Asset Management Company (fund house). An NFO period generally lasts for a few weeks. During this period, the units of the scheme are usually available at a NFO price of Rs. 10, however, the minimum application amount for an NFO is generally Rs. 500.
On the basis of the subscription period, mutual fund schemes can be classified as open-ended and close-ended schemes. An open ended mutual fund scheme is officially launched after the NFO period ends. It allows investors to enter and exit the fund anytime after they are launched. Whereas, a close-ended fund is a fund which does not allow entry and exit of investors after the NFO period, until maturity which is typically 3-4 years from the launch date.
5 Points To Consider Before Investing In An NFO
- Investment Theme of the Scheme – Begin by knowing the investment theme of the mutual fund scheme. Every NFO states in its Scheme Information Document (SID) what it aims to achieve (high returns, capital appreciation, etc) and how it aims to achieve it. For the answer to the ‘how’ question, you need to see how the scheme plans to allocate its assets, whether it will be an equity-oriented scheme or if it will predominantly invest in debt and money market instruments or will follow a hybrid approach.
- Track Record of the Fund House – Another important factor to consider is the track record and market reputation of the fund house. For this, you can check since when the fund house is in existence, how many mutual fund schemes it currently offers and the performance of these schemes. It is relatively safe to go with the NFOs of the established fund houses than newly-established fund houses. However, it should be the sole basis for selecting or not not selecting a particular fund house. There are many recently established fund houses in India which offer relatively fewer schemes but high-performing ones.
- Track Record of the Fund Manager – Knowing the track record of the fund manager is equally important as knowing the track record of the AMC as ultimately the fund manager is the person who will be managing your money invested in the scheme. You can check the track record of a fund manager by checking the performance of the schemes currently managed by him, or the performance of the schemes during the period they were managed by him, or his total number of work experience in the mutual fund industry.
- Costs Associated with the Scheme: Investors often get swayed away by the attractive NFO price which is generally as low as Rs. 10 and tend to ignore the costs associated with an NFO. It is important to checks the associated costs like the Entry Load, Exit Load, etc. Some fund houses impose an exit load if the investment is redeemed before a certain period of time. It is always important to be aware of the associated costs before investing in any investment instrument.
- Tax Implications: The earnings from mutual funds can be categorised into two heads – Dividends and Capital Gains. While the dividend earnings attract a Dividend Distribution Tax (DDT) which is deducted by the fund house from the dividend paid to you at 10%, capital gains tax is taxable in the hands of the investor. Capital gains tax treatment is different for different types of mutual funds.
|Asset Class||Holding Period||Rate of Tax on Capital Gains|
|Equity Fund||Short Term (Less than 1 Year)||15%|
|Equity Fund||Long Term (1 Year and more)*||10%|
|Debt Fund||Short Term (Less than 3 Years)||As per investor’s income tax slab|
|Debt Fund||Long Term (3 Years and more)||20% with indexation|
|Aggressive Hybrid Funds||Aggressive hybrid funds are taxed like equity funds.|
|Other Hybrid Funds||If more than 65% of assets of these funds are invested in equity, then hybrid funds are taxed like an equity fund. Otherwise, they are taxed as debt funds.|
*Long-term capital gains on equity mutual funds are exempt up to Rs. 1 lakh per annum.
Remember an NFO Is Not Same As An IPO
An NFO is often confused with an IPO (Initial Public Offering). NFOs and IPOs are two different concepts and should not be confused for the same thing. An IPO refers to the sale of a company’s shares before its listing on a stock market exchange. Whereas, an NFO is the first subscription offer for the units of a new mutual fund scheme. An IPO may be available at a premium, discount or at par with its face value on the basis of the supply and demand of the company’s shares. In an NFO, the mutual fund units are only available at the NFO price mentioned in its SID.
You can track all the NFOs on our NFO page.