What is NFO in Mutual Funds and Should You Consider Them?

In this world of consumerism and marketing, it is natural to be attracted to anything new - new gadgets, new cars, new restaurants, and so on. It generates excitement.

This tendency is observed even in the case of mutual funds.

In 2024, the Indian mutual fund industry raised Rs 1.18 trillion (tn) from a record-breaking 239 New Fund Offers or NFOs.

The number of NFOs launched have increased significantly in the last couple of years, with investors showing keen interest in market-linked investments in search of better returns.

Potentially, 2025 would also keep up the trend, given that fund houses have already applied to the capital market regulator to launch more schemes.

So far in 2025, several NFOs have been launched across various categories and subcategories.

Let's learn more...

What is New Fund Offer

It is like an initial public offering, but in mutual fund parlance, it is referred to as New Fund Offer(NFO).

It is a first-time subscription to the initial sale of units of a mutual fund issued by an asset management company to investors.

What investors get attracted to is the nominal price of Rs 10 per unit.

But keep in mind that new does not always mean better and investing at the Rs 10 offer price does not guarantee returns.

This is not the right approach to choose an NFO or any investment for that matter.

How to Approach NFOs

It's important to recognise if the NFO is really well suited for you. The NFO under consideration must align well with your needs.

Ask yourself the following pertinent questions:

• What is my risk appetite?
• What is my investment objective?
• What are my financial goals?
• What is my investment horizon?

Next is to understand the fund house and scheme-specific details.

In this respect, evaluate the following:

• The Background of the Fund House - Look at who the founders are, the sponsors, the fund management team, corporate governance standards, and how many years the fund house has been in existence. Ideally, the longer the track record, the better it is, as it adds to credibility.

• Fund House Forte and Investment Process & Systems - Certain fund houses may be good at managing equities, some may be good at managing debt, while some may have proved their mettle in both these asset classes. This can be recognised by the way the fund house has managed its equity, debt funds, hybrid funds, etc.

  Likewise, fund houses have their processes and systems. Evaluating this will help you. If a fund house hasn’t defined it and leaves it to the whims of fund managers, you should be wary.

• Investment mandate - Consider whether the NFO is open-ended or close-ended, the category and sub-category does it fall under (equity, debt, gold, solution-oriented, etc.), whether it will be actively managed or passively managed (index funds and ETFs), how it will allocate its assets, the investment strategy, who will manage the fund, and the investment objective of the scheme.

  All these details can be found in the scheme information document (SID), which you need to read carefully.

• Risk Profile - You will also need to understand the risk profile of the fund.

  Depending on the asset category (equity, debt, gold, hybrid, etc.), a fund is classified into six distinct levels as low risk, low-to-moderate risk, moderate risk, moderately high risk, high risk, and very high risk. The regulator makes it mandatory to disclose by way of a risk-o-meter. It is important that the risk profile of the fund matches your personal risk appetite.

• Cost - There are no free lunches. Every scheme levies an expense ratio (which subsumes investment management fees, brokerage on buying and selling securities, registrar & transfer fees, custodian fees, legal fees, audit fees, sales & marketing /advertising expenses, administrative expenses, etc) to manage it.

  The expense ratio should not be high so as to keep the cost of investing in check and the fund should justify it with a decent performance.

  [Read: Top 5 Equity Mutual Funds with Low Expense Ratio in India]

When you are considering NFOs, apart from the above, evaluate if it would truly add value to your investment portfolio.

Here Are some Hard Truths about NFOs...

• Launched in an Upbeat Market Environment - History shows that mutual fund houses open up NFO factories when the overall sentiments are positive.

  During a market correction - which may be actually good for the fund manager for portfolio construction - not many fund houses show the courage to come up with NFOs, fearing low mobilisation.

  That’s the reason why several NFOs were launched in the last couple of years amid upbeat market sentiments.

• Not all NFOs are Unique - In the race to garner more AUM and after the regulator’s categorisation and rationalisation guidelines for mutual fund schemes, most fund houses are trying to fill up the gaps in their product basket. That’s why they are launching all sorts of NFOs.

  The fund managers, as a result, are burdened with managing numerous schemes, which results in portfolio replication. Thus, you may not have anything unique to gain.

• No Track Record - Compared to existing mutual fund schemes, NFOs are yet to prove their worth. Many times, simply studying the SID, it is difficult to say how the scheme would fare in the future. It mainly depends on how the fund manager constructs the portfolio.

  Also, you cannot merely count on the performance of other schemes managed by the fund house. Given this, if there is an existing scheme from the same category and subcategory as the NFO, you may be better off with a scheme with a proven track record (of at least 3 years).

• Cost of Investing May be High - In case of certain NFOs, particularly the actively managed funds, initially, the fund house may levy a higher total expense ratio (subject to maximum permissible limits set by the regulator) because the size of AUM could be small. In effect, a high expense ratio may eat into the returns you earn.

Conclusion

The next time your bank relationship manager or mutual fund distributor, or investment agent pushes you NFOs, question him/her. Don't be lured by the Rs 10 proposition and let them outsmart you.

While you may be tempted to invest in NFOs to diversify, ask yourself if it would be a meaningful and valuable addition to your portfolio.

Consider only those NFOs that are truly unique and suit your investment needs.

Approach your investment intelligently, whereby you do not end up over-diversifying your portfolio.

[Read: How Many Mutual Funds Should You Invest in]

Also, be mindful that market conditions can impact the performance of funds. Hence, set your return expectations right.

If you do not possess enough skills to pick the best and most suitable mutual funds for your portfolio, seek the services of a SEBI-registered, unbiased investment adviser.

Be a thoughtful investor.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a recommendation and should not be treated as such.