Four Upcoming NFOs

Analysis Oct 04, 2020

What is NFO?

Just like there is Initial Public Offering (IPO) for stocks, there is New Fund Offer (NFO) for mutual funds. An Asset Management Company (AMC) launches a new mutual fund and raise capital for the same by launching NFO. The AMC has to share the portfolio details, fund manager details and the kind of securities it will purchase. Just like mutual funds, NFOs are theme-based - they could be for small caps, Blue chips, index, etc.

How does NFO work?

As per the Securities and Exchange Board of India (SEBI), a NFO can remain active in the market for a maximum of 30 days, meaning if an AMC starts taking in investment for a NFO today, they can keep the window open only for 30 days. The NFOs are usually available at a price of Rs 10. Once the NFO closes, the investment company uses the capital to buy securities like shares or government bonds from the market depending on the category of NFO.

Types of NFO

There are two types of NFOs offered by AMCs:
Open-ended fund - Once the NFO period ends, this type of fund is officially launched. Investors can enter and exit the open-ended fund at any time after the launch.
Close-ended funds - A close-ended fund does not allow entry and exit of investors after the NFO period until the maturity period. The maturity period is usually 3 to 4 years.

The open-ended funds are actively managed by portfolio managers, while close-ended funds are mostly passively managed as the idea is to replicate the returns of a corresponding benchmark index. Which is better? Well, both have pros and cons. If the AMC is small and there is a sudden outflow, it can force the fund manager to sell the stocks at rock-bottom prices which will cause loss to all unit holders. With close-ended funds, as mentioned above, there is a lock-in which is both an advantage (no sudden outflow) and disadvantage (cannot be used in case of emergency).

How to invest in NFO?

Investing in NFO is very simple. You can follow one of the below methods to invest in NFOs:
Brokers - If you have no idea about investing and you come across a NFO which interests you, the best way to invest is through a broker. Just ensure the broker is authorized one. A broker can help you with all the formalities of the application.
Online - If you have an existing account through which you purchase mutual funds, you can use the same account to purchase NFO. For example, if you have an account with Zerodha, you can simply search for the NFO which you want to purchase and apply for it. There is a separate section on its Coin platform which lists all the existing NFOs. Here is the link where you can see all open NFOs - https://coin.zerodha.com/nfo

Things to keep in mind before applying for NFO

The AMC launching it - History of asset management company influences the performance of the NFO launched. A good AMC will always have the best fund managers to manage the funds which will benefit the investors in the long run.

The minimum cost of investment - For some NFOs, you can invest as little as Rs 100 but in the majority of the cases, the minimum amount is Rs 5000.

Nature of securities - At the end of the day, you should know where your money is going.  If you have a decent idea of the financial market, you can go through the Scheme Information Document (known as SID) to get every detail about the NFO. If not, do little research where the capital will be invested. You can get NFO detail on AMC link as below:

https://www.icicipruamc.com/product-landing/icici-prudential-esg-fund

Risk Factor - When you invest in mutual funds, you can check the performance of the mutual fund since its inception while in the case of NFO no such data is available. For the same reason, going through the SID becomes more important.

Lock-in period - Check if there is any lock-in period. If so, see if it is in line with your investment goal.

If you are planning for fresh investment, you may consider below four NFOs that are open for investment.

ICICI Prudential ESG Fund - A lot of investors (especially in the US) are considering ESG when picking up the stocks - Environment, Social and Governance of the company. The trend is becoming popular now in India, even Indian investors are showing interest in investing in stocks that fulfill ESG parameters. Typically, when choosing stocks, investors choose stocks that will give the highest returns but in ESG, even though the stock may give high returns but if it is polluting the environment, you as an investor will not buy it. Given the growing interest of investors, ICICI has come up with a scheme dedicated to the theme. You can invest in it now. The NFO fund offer period closes on October 5, 2020, after which it becomes an open-ended scheme.

Mirae Asset Ultra Short Duration Fund - If you are looking for an ultra-short debt fund, you can consider this NFO for investment. It is also an open-ended scheme. This scheme is investing in debt instruments with a duration between 3 months to 6 months. The scheme will predominantly invest in highly rated instruments of AAA/A+ rated papers(which are the highest rating and chances of default are minimum in such cases). The subscription is already open and you can invest in it till 6 October. The minimum amount of investment is Rs 5000.

Nippon India Nifty Smallcap 250 Index fund - This is an index fund NFO that will imitate Nifty Smallcap 250. The index has the companies between 251-500 from Nifty 500. It is an open-ended equity scheme. 95% of the allocation will go in the Nifty Smallcap 250 while the remaining 5% will be in Money market instruments. Since the investments are going in small caps, it is suitable for investors with medium to high-risk appetite. The NFO is open for subscription and will close on 9 October. You will need to have Rs 5000 to invest in it.

Aditya Birla Sun Life Special Opportunity Fund - This is an open-ended scheme which will invest in unique opportunities created by special situations such as a change in government policy, corporate restructuring, regulatory changes in an industry, companies going through temporary but unique challenges, etc. You can invest in the scheme starting 5 October and the close date for this NFO is 19 October. This is suitable for investors with a high-risk appetite.

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Abhinav Mishra

I am the author of the book - The Unfortunates. I have written over 400+ blogs across the various niche. I love writing on topics around Finance & spirituality. My personal blog- www.wonderingalma.com

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