Difference Between NFO And Mutual Fund

An NFO (New Fund Offer) is when a new mutual fund is launched, and investors can buy units at a fixed price. A mutual fund, however, is an ongoing fund where you can buy or sell units based on its current market value. Simply put, an NFO is a first-time offer, while a mutual fund is already established.

What is NFO?

A New Fund Offer represents the initial subscription phase for any new scheme the asset management company has launched. Quite like the Initial Public Offering (IPO) in the stock market, this also allows you to buy mutual fund units at the very beginning before those units are listed on any exchange.

This is the phase when the fund is trying to raise capital from investors. Units are usually sold at a fixed price, especially to allow investors to join the fund at its launch. Success during this period is actually vital for building an initial corpus and investor base for the fund.

Post NFO, the fund is like any other mutual fund, and the units can be bought and sold at prevailing market prices. The performance of the fund post-NFO is linked to the market performance and the fund manager's strategy, just like other mutual funds.

What is a Mutual Fund?

In India, mutual funds are financial products that involve pooling the money of various investors to invest in a diversified portfolio consisting of equities, debts, and money market instruments. Professional fund managers handle such invested money to earn capital gains or income for the fund's investors.

Mutual funds offer a convenient way in which an individual may gain access to a diversified portfolio designed around various financial goals and criteria, spanning from conservative to aggressive. They also benefit investors through professional management and diversification, which may be out of reach for the individual investor.

Additionally, mutual funds are highly regulated by SEBI, so investors in India are provided with transparency and protection. It is an ideal investment option for every type of investor owing to its high liquidity, affordability, and availability of a wide array of options, like equity, debt, hybrid, and solution-oriented schemes.

Comparison of NFO Vs Mutual Fund

The table below gives a comprehensive overview of NFO and mutual funds:

Type of NFO

Based on when you can access your money, the types of NFOs are as follows:

Open-Ended Funds

Investment or redemption into open-ended funds can be done at any time. The investors can join or exit the fund with the prevalent Net Asset Value (NAV). They may, however, incur an exit load even after the initial NFO period is over.

Closed-Ended Funds

These are closed-ended funds, which gather the corpus for investment into securities. The funds, however, allow limited new transactions after the initial subscription period lapses and before the completion of the maturity term. Still, the fund houses list such schemes on stock exchanges, and investors can sell their units on the exchange if they decide to exit the scheme before maturity.

Interval Funds

Interval funds pool characteristics of both open-end and closed-end funds: they offer an opportunity for buying or selling at periodic intervals, quarterly or semi-annually, for example. Outside these intervals, the fund restricts redemptions, fulfilling liquidity needs and providing periodic opportunities for transactions.

How are NFOs in 2024 Performing?

So far, 117 NFOs have been launched in 2024. Since inception, the NFOs have collected earned 31.9%.

Of these, the Motilal Oswal Nifty Realty ETF has delivered the highest return of approximately 31.9% since its launch. Here is how the NFOs have performed against the alpha benchmark since 1 year after the launch:

Investing in NFO is risky because you trust the fund house and fund manager to perform well. While the NAV may be lower at the beginning during the launch, you must consider other costs, such as the expense ratio. Marketing costs and various variables may make NFOs costlier than existing funds. Without background data to analyse, investors must apply due diligence before investing in NFOs.

Factors to Consider Before Investing in NFO

While NFOs are alluring with a higher risk-return ratio, you have to look at the following before investing in the NFO:

• Fund House Reputation -  Check the background of the AMC regarding experience and other fund performances. A good, reputed AMC will likely manage the new fund well.
  
• Expertise of the Fund Manager - The experience and past performance of the fund manager are the most critical aspects. Check their past successes and the way they work.
  
• Investment Horizon - NFOs are only suited for long-term investors who would give time to the fund to execute its strategy and give returns in due course.
  
• Risk Assessment - The risk factors associated with an NFO are market risk, interest rate risk, and credit risk. Ensure the fund's risk profile aligns with your risk tolerance level.
  
• Category and Benchmark - Recognise the fund's category, equity or debt, and its benchmark. This will set reasonable return expectations, and a comparison can be drawn.
  
• Regulatory and Legal Features - Consider the NFO's regulatory environment regarding SEBI regulations related to disclosure.
  
• Lock-in Period - Many NFOs have a lock-in period, especially in the ELSS category. Understand how this may impede your liquidity needs.

NFO Advantages And Disadvantages

Advantages of NFO

• Fresh Investment Theme -  NFOs often come out to catch an emerging market trend or a new investment theme. This allows the investors to be part of a new, potentially rewarding strategy right from its inception.
  
• Lower Initial Costs -  NFO units are typically offered at par value, usually Rs. 10, during the subscription period. As a result, an investor can buy relatively more units for the same low initial investment compared to a mutual fund.
  
• Potential for Immediate Profits - Investment in NFOs from the beginning might have the potential for early gains if the fund does well right from the start. The growth at the initial phase will accrue to the early investors before it gets the correct publicity.
  
• Managerial Expertise - Many NFOs have been launched with experienced managers. Investors flock to these funds, anticipating higher returns based on the manager's expertise.

Disadvantages of Investing in NFOs

• Lack of Track Record - One major drawback with NFOs is that they lack a track record. Unlike other funds that have already existed, new funds do not provide any historical data about how it has performed. It will, therefore, be difficult for an investor to know how the fund will behave when there are changes in the market conditions.
  
• Uncertain Performance - The performance of the NFOs remains uncertain until several market cycles are experienced. As there is no proven track record, the risk level for the investors increases.
  
• Lack of Information NFOs – NFOs generally come with void information during the subscription period compared to existing funds, which provide detailed historical information and analysis. This leaves investors unable to know the fund's potential from merely the information in the offer document.
  
• No Immediate Liquidity - The NFO units cannot be traded on the stock exchange until the fund is officially launched and listed. This will disadvantage those investors who prefer buying and selling units on the stock exchange.
  
• Overpricing - During the NFO subscription period, investors buy units at face value. The unit price determination occurs after listing through demand and supply. In these cases, chances of overpricing occur when the determined market prices are above the intrinsic value of the stocks.

Advantages And Disadvantages of Mutual Fund

Advantages of Mutual Fund

• Liquidity - Mutual funds provide excellent liquidity because the investor can sell or buy units any business day at Net Asset Value (NAV). Investors can easily access their money back, an opportunity lacking in real estate investments, which could pose some complications.
  
• Diversification - Mutual funds pool investor money to be diversified across asset classes, such as stocks and bonds. Such diversification spreads the risk and enhances the growth potential that would otherwise be prohibitively costly and cumbersome for individual investors to achieve by themselves.
  
• Professional Management - Mutual funds have skilled managers who will apply their understanding of the markets and the available data in making enlightened investment decisions. This is quite helpful for investors who would not invest the time or do not have the specialisation to manage investments actively.
  
• Portability and Accessibility - Minimum investment of mutual funds is kept at a level that makes them more accessible to a broader class of investors. Small amounts could also be invested at regular intervals in mutual funds through the Systematic Investment Plan (SIP) approach. This helps teach the saving discipline.
  
• Variety of Options - An investor could consider different types of mutual funds. These range from equity funds for growth, debt funds for income, and hybrid funds for a balanced approach.
  
• Tax Efficiency - Certain mutual funds, like the Equity Linked Savings Schemes (ELSS), offer a tax benefit under the provisions of Section 80C of the Income Tax Act. Investing long-term in mutual funds also provides the benefits of a low tax on capital gains.

Risks of Mutual Fund

It also holds several risks, as mentioned below:

• Costs and Fees - Mutual funds have associated costs, including management and entry or existing loads. In most cases, these dig into the overall returns of the common fund, majorly in the case of an actively managed mutual fund whose fees are high.
  
• Market Risk - The investments within a mutual fund face the risks associated with the different fluctuating market conditions. Since market investments are usually pegged on the behaviour of the market, the values of holdings on either side may decline or increase, thereby not allowing the investor to collect the initial investment value.
  
• Volatile Return - Returns on mutual funds fluctuate with the conditions in the market. That could make the consistency in performance challenging to maintain, and it might be tough for an investor hoping for stable returns.
  
• Lack of Control - There is no way investors can have control over what goes on within the portfolio; instead, this is left out for a fund manager. Investors have to allow fund managers to make decisions about selling and buying assets, which may be against an investor's will.

Overview of SEBI Regulations on NFOs

EBI has laid down regulations about the launch of NFOs aimed at investor protection and maintaining market stability. Some important regulations are as follows:

• Fund Categories -  SEBI limits the type of 'fund categories' to be launched so that the market is not saturated with funds or suffers from undue competition. This ensures a balanced and diversified market.
  
• Transparency requirements - A fund house must clearly mention investment objectives, investment strategy, and risk factors behind such offerings. Transparency enhances the investors' informed decisions.
  
• Disclosure - SEBI requires that detailed disclosures be made in the offer documents regarding the structure of the fund, costs involved, and potential risks. This would cover all the information an investor needs when venturing into an investment.

Impact of SEBI Regulations on the Mutual Fund Industry

SEBI guidelines strongly influence both the NFOs and existing mutual funds in the following ways:

• Investor Protection - It enhances investor protection through transparency that reduces misrepresentation, building trust in mutual fund industry investment.
  
• Market Dynamics - SEBI prevents overcrowding in the market by regulating NFOs and ensures that any new funds offer some uniqueness in value proposition. The regulation aids in maintaining good competition and encourages innovation in the mutual fund sector.

How to Invest in NFOs?

Investing in NFOs is a strategic move that will complement your portfolio and financial goals. It is, therefore, very important to know how to effectively incorporate NFOs into the existing portfolio to maximise investment benefits.

Diversification and Portfolio Allocation

When integrating NFOs into your portfolio, it is very important to consider how they fit within your greater investment strategy. To do so, start by:

• Balancing out risks - Check out the risk profile of the NFO and relative performance against your existing investments. Diversification with NFOs offering different exposures or strategies will reduce concentration risk and improve your portfolio's overall stability.
  
• Strategic Allocation - The scheme's objectives and risks must be evaluated before you decide to allocate an adequate portion of your portfolio to NFOs. This would keep your portfolio appropriately balanced concerning your long-term financial goals.

Long-term and Short-term Investments

NFOs can be designed for both kinds of investment horizons, and investors should try to match them with specific requirements:

The NFOs are useful for creating long-term wealth, provided the scheme is designed for growth over the long term, such as equity-based or growth-oriented strategies.

Some NFOs are designed to capture short-term opportunities or market conditions. In such cases, these would be ideal for those with a short window of time to generate returns or even capture short-term market fluctuations.

To do this, you will need to carefully follow each NFO strategy and further match it with your goals for investment. You can make informed decisions to optimise your portfolio and generate returns appropriate for your financial goals.

Latest and Upcoming NFOs in 2024

Here is a list of upcoming NFOs available for subscription:

Conclusion

Although NFOs and mutual funds offer avenues for investment, they cater to different investor profiles and risk appetites. NFOs generally suit investors with a higher risk tolerance and a longer investment horizon. Generally speaking, mutual funds are relatively safer because investors benefit from diversification and professional management.

The one to choose, NFO or mutual fund, depends on your financial goals, risk tolerance, and investment horizon. It is essential to do your homework by considering the fund manager's experience, the fund's performance history, and underlying investments.

Ready to start your investments? Explore the different types of NFOs and mutual fund investments on the Choice platform.

FAQ

NFO Vs SIP

Here are some sentences comparing NFOs vs SIPs:

• NFOs are like buying into a new business venture, while SIPs are like consistently adding to an existing investment.
• NFOs offer the potential for higher returns but also come with higher risk, whereas SIPs are a more conservative investment option.
• NFOs have a limited subscription period, while SIPs can be started at any time.
• NFOs are suitable for investors seeking new opportunities, while SIPs are ideal for those looking for a disciplined investment approach.