Best NFOs to invest in 2022 in India
What is NFO?
An NFO or New fund offer is an introductory offer for investors. Whenever a new mutual fund gets launched and declared out to the public, a New Fund Offer (NFO) occurs. There are two purposes of an NFO. First, to introduce a new fund to the public. Second, it helps fund houses raise capital.
There are two types of NFOs:
- Closed-ended NFOs: These funds are open for investment for only a specified NFO period, usually 30 days. Once the NFO period ends, investors can't invest these funds. Closed-ended funds come with a maturity period of 3-4 years. During this duration, investors aren't allowed to redeem their units or exit the fund.
- Open-ended NFOs: These funds are available for investment when the NFO period ends. In open-ended funds, the price of fund units is higher than that of closed-ended NFOs. Here, the purchase value of these NFOs is basically their face value (NAV). With these NFOs, Investors can buy or sell units as per their wish. As a result, these funds ate one of the preferred ones.
Each NFO gets launched with a unique theme and specific objective that investors may select based on their financial goals and interest.
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Who should invest in an NFO?
If you are at the start of your investment journey, NFO might be an option to consider. NFO offers investors an excellent opportunity to invest in mutual funds at a minimal price. NFOs are usually available at Rs 10, much lower than their actual Net Asset Value (NAV). So you have the possibility to earn from a lower offer price and higher NAV price. However, your goal should be to remain invested in these funds for the long term.
Taxation of gains from NFO
NFOs are basically mutual funds, so the same taxation applies to them as to equity and debt funds. In NFOs, the taxes on gains are decided based on the holding period.
For equity-related NFOs, if the units get redeemed before one year, then gains are considered short-term and taxed at 15%. If the units get redeemed after one year, the gains are considered long-term capital gains. Long-term gains get exemption from tax for up to 1 lakh, and 10% is applicable on capital gains exceeding 1 lakh.
In the case of debt funds, short-term capital gains (if you redeem units before three years) get taxed as per the investor’s income tax rates, and long-term capital gains get taxed at 20% with the indexation benefit. The debt fund gains are decided based on a holding period of 3 years.
Risk Associated with NFO
NFOs may provide investors the benefit of portfolio diversification and offer attractive profits, but there are certain risks associated that investors must consider before investing in them.
- No past performance record: Unlike existing funds, NFOs don't have a performance history. Without benchmarks and metrics, it's hard to compare NFO with other funds and predict its performance for decision-making. As a result, investing in NFO could be a risky bet. To avoid such risks, you must get your risk profiling done by financial advisors such as Glide Invest before investing. Also, make sure to check the fund house's reputation, fund's objective, and lock-in period if it's a closed-ended fund.
- Higher expense ratio: Although NFOs are managed in small units and have a face value much lower than existing funds, they can levy higher expense ratios. That is so because a whole lot of marketing things go on for the promotion of these funds when they hit the market, and the related expenses are added to the management expenses and have to be paid by the investors.
Returns from NFO
NFOs can drive better returns than other funds as the fund units are cheaper (usually available at Rs 10) than the existing funds in the market and the actual NAV of the NFO fund. This difference in the NAV and NFO offer price is of advantage as it has the potential to bring about significant gains once the units begin to trade publicly. For the Investors looking for a value-for-money proposition, these funds are a too-good-to-miss opportunity.
Advantages of investing in NFOs
Investing in NFOs has many advantages. Here is a peek into some prominent ones that investors experience with their NFO investment.
- Low investment cost: Investing in NFOs is a lot cheaper than existing funds as these are introductory funds and new in the market. These funds offer investors an excellent opportunity to invest in mutual funds at a nominal price and earn better returns. Moreover, these funds allow you to invest in funds before they even list in the market.
- Flexibility: NFOs, especially closed-ended NFOs, offer investors the flexibility to retain a portion of their investment and invest later, depending on their convenience. Having that flexibility allows them to invest in these schemes based on the market conditions and thus earn better returns.
- Exposure to new asset classes: When investors invest in an NFO mutual fund, they get opportunities to invest in and gain exposure to new asset classes, themes, and strategies while diversifying portfolios. Basically, NFOs allow investors to invest at nominal rates, experience unique fund schemes and realize better returns.
Why should you invest in NFO?
One of the significant reasons that NFO is a good investment opportunity is its value for money. Since the NFOs are introductory funds, they are cheaper than existing funds. NFOs are usually available at Rs 10, much lower than their actual Net Asset Value (NAV). This difference in the NAV and NFO offer price enables these funds an ideal investment to benefit from both lower offer price and higher NAV price.
Besides, NFO mutual funds allow investors to diversify their portfolios across various asset classes, sectors, and market caps. Furthermore, with NFOs, investors can invest in innovative funds focusing on the emerging sectors of India and newer companies, which are rare that existing funds incorporate. But, unlike existing funds, NFOs are newer funds, so they don't have a past performance history. Hence, investors should select an NFO only if it offers an unusual investment opportunity.
NFOs are one of the best ways to reap the benefits of mutual funds. These funds have many advantages, provided your due diligence about NFOs before investing. Investors must gain a complete understanding of these funds before investing. That is so because these funds are newer in the market. They don't have past historical performance data wherein you compare their performance. With the availability of different kinds of funds in the market, it's hard to identify and pick an NFO that offers you an innovative opportunity yet has the potential to deliver better returns. It is advisable to consult an expert financial advisor such as Glide Invest to acquire complete details about NFO mutual funds and select the scheme based on your investment profile while adhering to its related terms and conditions.
Got more queries related to NFO investment? See, we have already got you covered with this FAQ section.
Are NFO and IPO the same?
- Ans: NFO and IPO are similar in a way that both prioritize raising the capital for further operations. However, a difference is that Initial Public Offering (IPO) invests in stocks and NFO in mutual fund units.
How to invest in the right NFO?
Ans: Here are the things to consider before investing in NFOs
- Read the Scheme Information Document (SID) and understand the scheme's investment objective.
- Check the background and previous performances of the fund house & the fund manager
- Check if the fund scheme offers you a unique proposition or not.
- Consider the cost-associated exit load (if any) & expense ratio.
- Consider your risk profile and investment appetite before investing.
- Ans: Here are the things to consider before investing in NFOs
What is the minimum investment amount for an NFO?
- Ans: Investors can get started with an NFO as low as Rs 500. However, every fund scheme has its minimum amount, which can be between Rs 500 to Rs 5,000.
Does NFO offer profitable returns?
- Ans: Yes, provided you do your due diligence of research and investment of NFO.