Should you invest in a New Fund Offer (NFO)?
Reading Time: 7 minutes
NFOs offer low NAV, more units, and new strategies. It’s essential to understand the risks, common misconceptions, how it aligns with your financial goals, and whether they truly add value to your investment portfolio.
Imagine you’re at a festive fair in your hometown. There’s a new sweet stall that everyone’s talking about. The vendor claims their sweets are fresher, cheaper, and tastier than the well-known stall that’s been around for years. But should you trust this new stall just because it’s offering something new? Investing in a New Fund Offer (NFO) is quite similar.
Let’s understand the basics and explore whether an NFO is the right choice for you.
What is a New Fund Offer (NFO)?
A New Fund Offer, or NFO, is when a mutual fund company, also known as an Asset Management Company (AMC), launches a new mutual fund scheme. It’s like a new shop opening in the market. An AMC might introduce an NFO to expand its existing range of products or to capitalise on a new investment trend. When you invest in an NFO, you’re essentially putting your money into a brand-new mutual fund that hasn’t been tried or tested.
In FY 2024, the Indian Mutual Fund industry collected ₹66,000 crores through NFOs, and ₹62,000 crores in FY 2023. Clearly, many people are interested, but should you be one of them?
Let’s look at what an NFO offers and whether it aligns with your investment goals.
What Happens During an NFO?
When an NFO is launched, there’s a specific period during which you can invest in the fund. This period usually lasts a few days. The AMC will outline how and where the money collected will be invested.
Once the NFO period closes, the fund managers use the collected money to purchase securities (like stocks or bonds) that align with the fund’s objectives. After a short period, the fund becomes available for regular purchase and sale by all investors.
What are the Benefits AMCs Claim for Investing in an NFO?
Investment in an NFO is generally offered with the following benefits-
- You get low Net Asset Value (NAV)/ discounted rate
- You get more units
- Limited Period Availability
- Make short-term gains
- Exposure to new strategies
- Diversification of your portfolio
It’s crucial to assess each one carefully. Let’s look at these benefits-
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You Get Low Net Asset Value (NAV)
One of the main attractions of an NFO is its low Net Asset Value (NAV). NAV represents the per-unit value of the mutual fund, calculated by dividing the total assets minus liabilities by the total number of units of the fund.
Typically, an NFO starts with an NAV of ₹10. This low NAV might seem appealing, especially compared to an older fund that has a much higher NAV due to its past performance.
However, it’s important to remember that NAV reflects the performance of the underlying securities. For instance, an older fund like the UTI Nifty 50 Index Fund launched in 2000 started with an NAV of ₹10, which grew to ₹155 by 2024 due to consistent performance.
Comparing the NAV of an existing fund with a proven track record to that of a brand-new NFO isn’t exactly fair because the NFO lacks any performance history. So, while a low NAV might get you more units, it doesn’t guarantee better returns.
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You Get More Units for Your Investment
With a low NAV, an NFO allows you to buy more units for the same amount of money compared to an existing fund with a higher NAV. For example, if you invest ₹1 lakh in a fund with a NAV of ₹10, you’ll get 10,000 units.
In contrast, if you invest the same amount in a fund with an NAV of ₹50, you’ll only get 2,000 units. It might feel like you’re getting more value for your money with the NFO.
| Particulars | New Fund | Existing Fund |
| Amount Invested | ₹ 1,00,000 | ₹ 1,00,000 |
| Starting NAV | ₹ 10 | ₹ 50 |
| Units allotted to you | 10,000 (1,00,000/ 10) | 2,000 (1,00,000/ 50) |
| NAV after one year | ₹ 11 [10 + (10% of 10)] | ₹ 55 [50 + (10% of 50)] |
| Your Investment Value | ₹ 1,10,000 (10,000 X ₹ 11) | ₹ 1,10,000 (2,000 X ₹ 55) |
You can see that you got more units in the New Fund (10,000 units) than the existing fund (2,000 units). However, the value of your investment under each remain the same.
If both the NFO and the existing fund deliver the same return rate, your overall investment value will be the same, regardless of the number of units you hold. So, getting more units in an NFO doesn’t necessarily translate to better returns.
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NFO is Available for a Limited Period
NFOs often create a sense of urgency, like a flash sale at your favourite clothing store. But just like how clothes go back on the racks after the sale ends, NFOs also become available for regular investment after a short while.
NFOs are open for a short time. This limited period might make you feel like you’re missing out if you don’t act quickly. However, once the NFO period ends, the fund is typically available for purchase again within a few days. Therefore, you’re unlikely to miss out on a significant opportunity just because you didn’t invest during the initial launch period.
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You Can Make Short-Term Gains
Some investors view NFOs as a way to make quick gains. However, this approach comes with risks. There’s no guarantee that the fund will perform well in the short term, and market conditions could lead to losses just as easily as gains.
Mutual funds, particularly equity funds, are generally recommended for long-term investments, so if you’re looking for short-term profits, an NFO might not be the best option.
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An NFO Provides Exposure to New Strategies
Sometimes, NFOs come with new investment strategies, like a new cooking recipe. But just because the recipe is new doesn’t mean the dish will be delicious.
The same goes for new investment strategies—they might work, but they also carry the risk of underperformance because they lack a proven track record.
The five NFOs that have collected most funds in India’s Mutual Fund industry history do not support the rationale of investing in NFOs for short-term as you can see in this table-
| Scheme Name | AUM
(₹ Crores) |
Launch Date | Periodic Returns from respective NFO Launch Date | ||||
| 1 Week | 1 Month | 3 Months | 6 Months | 1 Year | |||
| SBI Balanced Advantage Fund | ₹14,551 | 31-Aug-2021 | 0.52% | 1.75% | 0.91% | 0.77% | 5.00% |
| ICICI Business Cycle Fund | ₹4,185 | 18-Jan-21 | -0.50% | 7.90% | 4.60% | 16.80% | 34.20% |
| NJ Balanced Advantage Fund | ₹5,216 | 29-Oct-21 | 0.10% | -1.50% | -3.00% | -2.40% | -2.40% |
| ICICI Pru Flexi Cap Fund | ₹9,808 | 16-Jul-21 | 0.10% | 2.50% | 10.30% | 11.40% | 5.90% |
Source – NAVs taken from AMFI | Returns calculated by Anuj Kesarwani, founder, Zenith Finserve
In contrast, existing funds have a track record that can help you make a more informed decision. So, while new strategies might seem appealing, they could also lead to unpredictable outcomes.
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You Can Diversify Your Portfolio by Investing in an NFO
Diversification is like having a platter with different dishes—each one adds a unique flavour, and together they create a balanced meal.
In finance, diversification means spreading your investments across different assets (like stocks, bonds, and gold) or sectors (like technology, pharmaceuticals, and manufacturing) to reduce risk.
NFOs are sometimes marketed as a way to diversify your portfolio. However, simply adding a new fund to your portfolio doesn’t guarantee better diversification. If the new fund invests in similar assets or sectors as your existing funds, it won’t add much value to your portfolio. It’s like adding another lentil to your platter.
What Should You Do?
NFOs may seem attractive with their low NAV, more units, and new strategies, it’s essential to look beyond the surface. Just as you wouldn’t buy from a new sweet stall without tasting the sweets first, don’t rush into investing in an NFO without fully understanding how an NFO aligns with your goals.
Investing wisely is about making choices that align with your long-term goals, not just following the crowd.
Always ask yourself: Does this investment fit my financial goals? Is it adding true value to my portfolio? And most importantly, am I making an informed decision? For more insights on the myths surrounding NFOs, you might find what we wrote on this Moneycontrol blog helpful.
How Can Zenith Finserve Help You with Your Investments?
At Zenith Finserve, we don’t just suggest investments; we align them with your goals and preferences, to ensure that your portfolio is well-rounded and suits your needs.
That’s why we’ve developed our comprehensive Investment Framework—focused on safety, liquidity, and returns—to guide you in making informed, rational decisions tailored to your unique financial situation.
With our approach, you’ll have the confidence to stay focused on your long-term objectives, no matter what the market throws your way. We are helping more than 70 Indian families cruise towards their goals.
Check out what our trusting clients have to say about us. Ready to take control of your finances with a disciplined approach? Let us help you create a strategy that works for you. Reach out to us today!
FAQs
What is an NFO?
An NFO (New Fund Offer) is the launch of a new mutual fund where investors can buy units of the fund at its initial price. It’s an opportunity to invest in a new fund before it is available to the general public.
Is NFO good for investment?
An NFO (New Fund Offer) can be a good investment if the fund’s objectives align with your goals. It’s a chance to invest in a new fund at its starting price, but do your research first.
What is ₹ 10 NFO?
₹ 10 NFO refers to the price at which you can buy units of a new mutual fund during its launch. It’s the initial price per unit set by the fund.
What is the difference between IPO and NFO?
An IPO (Initial Public Offering) is when a company offers its shares to the public for the first time. An NFO is when a mutual fund company offers new units of its fund to investors for the first time.
Which is better: NFO or SIP?
It depends on your goals. NFOs offer new investment opportunities, while SIPs (Systematic Investment Plans) let you invest regularly over time. SIPs are generally safer and more disciplined.
Who can buy NFO?
Anyone who meets the eligibility criteria set by the mutual fund company, typically including being an Indian resident and having a valid PAN card.
Can I withdraw money from NFO?
Yes, you can withdraw your investment from the mutual fund after the NFO period ends, but check the fund’s terms for any specific rules.
What is the lock period for NFO?
NFOs don’t usually have a lock-in period. However, the mutual fund might have its own lock-in or exit conditions, so check the details before investing.
What is the maturity period of NFO?
NFOs don’t have a maturity period. The mutual fund’s maturity depends on the type of fund and investment strategy, so review the fund’s details for specific information.