NFO (New Fund Offer)

Table of Content

1. What are NFOs?

2. What are the key features of a NFO?

3. Types of NFOs

4. Why NFOs Are Beneficial?

5. Functionality of NFOs

6. Key Benefits of Investing Money in an NFO

7. Why an NFO Can Be a Good Investment Opportunity

8. Important Points to Know Before Investing in NFOs

9. How Can You Invest in an NFO?

10. Who should invest in NFOs?

11. Conclusion

12. FAQs on NFOs

In ULIP Plan, the investment risks in the investment portfolio is borne by the policyholder

If you seek a novel and exciting investment opportunity that provides significant returns, NFOs are what you need to explore. One good way to tap the many benefits of investing in NFOs is through market linked financial products. Life Insurance companies provide the opportunity to invest in such avenues through New Fund Launches (NFLs) by investing in Unit Linked Life Insurance Plans (ULIPs).

This seamlessly blends life insurance coverage with some great investment opportunities. Introducing NFOs or NFLs to ULIPs adds flexibility to the policyholder's investment strategy.

Let's learn about NFOs, their types, and why it is sensible to leverage NFOs within your ULIPs. Read on if you are ready to increase the diversity of your investments and the quality of your portfolio.

What are NFOs?

An NFO (New Fund Offer) allows people to invest in financial securities during the initial offer period. All New Fund Offers will have different investing objectives, asset allocations, and methods.

Introducing a New Fund Offer enables policyholders to integrate life insurance with investment benefits. Therefore, it is created to earn long-term capital gains and financially safeguard the policyholder's loved ones in case of their untimely death.

Using NFOs or NFLs, life insurance companies can develop innovative new policies.

What are the key features of a NFO?

• Initial Offer Price

It is the price at which the investors buy units of a NFO during its subscription period. It is usually available at an NAV of ₹10.

• Subscription Price 

The investors buy a New Fund Offer of a New Fund Launch during a specified duration which can be a day or perhaps up to a few weeks. 

• Units 

Investors can purchase units of these New Fund at the fixed initial offer price.

• Investment Objective 

The investment objective of the New Funds launch will differ based on the type of funds invested, such as large-cap, mid-cap, small-cap funds, etc.

Types of NFOs

There are three types of NFOs: 

1. Open-ended NFOs 

With open-ended NFOs, investors have additional flexibility as there is no specified maturity date. Because of this, investors have a lot of leeway to react to market fluctuations or their financial circumstances by purchasing and selling units anytime they choose. One great thing about open-ended NFOs is how liquid they are. Investors quickly access the NAV per unit when they redeem their units. An open-ended fund is a fantastic choice for an investor who may need access to their money fast.

2. Close-ended NFOs

A closed-ended NFO runs for its declared maturity term in the prospectus. One way closed-ended funds differ from open-ended ones is by the set time. This helps investors understand the investment horizon more clearly. Investors can enrol in the fund during its first subscription period, which is common for closed-ended funds. The subscription term will then come to a close.  

3. Interval Fund NFOs

Interval funds combine the features of both closed-end and open-ended funds. Like closed-end funds, they have a predetermined end date for when their money will have been invested. They provide investors with limited liquidity options, like open-ended funds, by restricting redemptions or sales to certain times over the fund's lifespan. The goal of interval funds is to balance extreme stability and high liquidity. Participants are given periodic opportunities to recover their money, which helps to guarantee the fund's viability by confining redemptions to predetermined intervals. This structure can appeal to investors seeking a compromise between open-ended and closed-end fund types.

Why NFOs Are Beneficial?

The following are some benefits:

• Early Bird Advantage

Participation in an NFO or NFL allows policyholders to purchase a new insurance product at an early stage. For instance, early adopters of Unit-Linked Insurance Plans (ULIPs) via New Fund Launches may access lower premiums, more attractive features, and the chance to earn more money. Policyholders who invest early in an NFO can take advantage of the growth potential of the underlying investment funds or insurance products, which could result in higher long-term returns compared to those who join later.

• Innovative Features

To meet the demands of an ever-evolving market, NFOs offer improved features and benefits. These include - premium discounts, loyalty incentives, more coverage options, and value-added services. Such innovative features set ULIPs via NFLs apart from traditional insurance policies.

• Modularity and Individualization

With the NFO feature in life insurance, policyholders can customise their coverage to match their needs. Lot assured, premium payment terms, policy length, and riders/add-ons are just a few of the ways policyholders can tailor the insurance product to their specific needs and financial goals. Insurance policies can be tailored to suit customers' needs by considering their risk tolerance, financial situation, and future objectives within this customisation process.

• Higher Earnings

There is a possibility that NFOs may offer higher returns than existing insurance policies, especially for ULIPs and other investment-linked insurance plans. If a policy is willing to put its money into NFOs, they are better positioned to benefit from investment returns and market fluctuations. In addition, NFOs frequently employ dynamic asset allocation algorithms, which may enhance returns over time by optimising investment allocations based on risk profiles and market conditions.

Functionality of NFOs

Insurance companies spend much time and effort researching to know what their customers want, where the market is heading, and what is missing. Information from various channels allows companies to develop new types of insurance products for particular purposes and population groups.

The regulator must be the first point of call during the process to ensure any NFO or NFL conforms to the regulatory procedure and guidelines. It will be based on regulations to trend with the best transparency, equality, and customer safety standards.

The marketing plan should be specific and straightforward to help NFOs stand out from sleep markets and reach untouched customers. Marketing, targeted marketing on the internet, and means for distribution are life insurance companies' tools for acquiring new clients and selling their new insurance products.

For sustainability and the longer-term goals of this NFO, insurers must hold periodic reviews of what is to be improved and, after that, make necessary corrections.

Key Benefits of Investing Money in an NFO

If you are investing in market-linked funds, diversifying your portfolio is key to balancing risks with rewards and optimising returns. Include New Fund Offers in your investment strategy to reap the following benefits of NFO:

Latest Investment Options

A ULIP introduces NFOs and creates an opportunity for investors to diversify their portfolios in new asset classes. NFOs are designed around novel and theme-specific strategies. The focus is on themes such as technology, environment, governance, international markets, etc. Well-managed innovative strategies lead to substantial growth. With an initial offer price of ₹10, investors can look forward to higher returns over time.

Spreading Your Investments

Diversifying investments across various asset classes and industry sectors is the key to optimising returns. Including NFO in your investment strategy gives scope to new assets that add variety to your portfolio. 

Customisation

NFOs introduce new themes, sectors, and assets that do not exist in your existing fund. This innovative spread aims to support the unique needs of investors. They allow you to sync your portfolio to your financial goals, risk profile, and market outlook. You can readjust your portfolio to balance the risks and rewards and optimise the returns. 

Why an NFO Can Be a Good Investment Opportunity 

NFOs can be a good investment opportunity as they give exposure to a new investment sector, theme, and asset class. Similar to IPOs, where equities are offered at a lower price before they are traded in the stock market, NFOs offer units at a lower price, often at ₹10. With the right choice of funds and efficient management, NFOs extend a long-term growth potential and strengthen your existing portfolio.

Important Points to Know Before Investing in NFOs

Before including NFOs in your portfolio, consider the following:

NFO Basic

Before investing in an NFO, understand the features, investment objectives, and strategy. You must also accept that it is a new fund without a performance history. Though offered at a price as low as ₹10, the growth depends on the fund management and the future market trends. 

Please Read the Offer Document Carefully

For clarity about the new fund offering terms, read the offer document. It contains the new fund’s investment objectives, strategies, risk factors, charges and other expenses, and other services available for the investors. 

Managing Risks

NFOs do not have a performance history to understand their past management and investment strategies. Study the risks associated with the investment, such as market risk, liquidity risk, and credit risk. Also, evaluate your investment horizon, risk tolerance, and the fund’s strategy before making a decision. Avoid putting a major portion of your savings in a new offer. Instead, diversify your portfolio.

Checking the Background

A background check on the ULIP fund house is critical for safe investment. Review the reputation of the fund house and the fund manager’s expertise. A strong track record and management are the elements that determine the fund house’s capability in handling the new fund.

Purpose and Plan of the Fund

Understand the fund’s intention, target sectors, and investment strategy to evaluate whether investment in the fund aligns with your goals, timeline, risk appetite, and market trend. This ordeal ensures that the fund supports your entire portfolio strategy.

Costs and Expenses

Costs and expenses incurred in a fund impact your overall returns. Various charges, such as premium allocation, policy administration, fund management, surrender charges, etc., are levied. Compare them with the existing ULIP charges. Lower expenses translate into higher overall returns. 

Lock-in Period

A lock-in period reduces the liquidity of a fund. You cannot withdraw from your fund for such a period. Knowing about the lock-in period before investing helps you plan your liquidity. You can decide whether you are comfortable with blocking your funds for that specific period. 

Performance of Funds Like This in the Past

You cannot track the past performance of an NFO, as they do not have a history. So, check the past performance of an existing fund with a similar theme floated by the same fund house. This clarifies how the fund house has handled the market cycles and managed returns over time. 

Meeting Legal Requirements

Ensure that the NFO complies with SEBI and Asset Management Companies (AMC) regulations and is launched by a reputed fund house. Also, confirm whether the NFO has approval for a public offering with proper disclosures made in the document. This ensures transparency and investor protection. 

How Can You Invest in an NFO?

To understand how to invest in NFO, follow the simple steps given below:

Learn About the NFO Details

Understand the important details about the NFO, such as the objective, asset allocation, risk level, and minimum investment amount. This fact check will ensure that the scheme aligns with your financial goals and risk appetite. 

Check the NFO Launch and Closing Dates

The window for investing in an NFO is open only for a specific period. Knowing the opening and closing dates will enable you to plan your investment and subscribe within the timeframe. If you miss the deadline, you will have to wait until the fund is listed and available for regular purchase. 

Complete KYC Requirements

It is mandatory to complete the KYC to invest in an NFO. You must submit a KYC application along with necessary documents, such as PAN, Aadhar Card, and address proof. Investment in NFO is permitted only after verifying your address and identity. The KYC can be done either online or offline, depending on the KYC Registration Agency’s. 

Decide the Investment Amount and Payment Mode

NFOs have a minimum subscription condition. Evaluate your financial goals, risk appetite, and timeline and decide the amount you choose to invest. Choose a convenient payment mode, such as net banking, auto-debit, UPI, etc., for timely processing. 

Track the Allotment and Listing Process

The allotment is done 5 to 10 days after the NFO closing date. You can track the allotment and listing process through your investment platform or check your SMS or Email for updates.  

Who should invest in NFOs?

NFOs are a good option for savvy investors to diversify their portfolios. However, the following are the target audiences for NFOs:

Investors Looking for Portfolio Diversification

Investors wishing to diversify their portfolio with new investment strategies, sectors, themes, and asset classes not included in their existing ULIP funds. Investors get exposure to untapped opportunities. They can minimise the risk with the asset allocation that enhances the chance of long-term growth potential across varied market conditions. 

Long-Term Investors with Moderate-to-High Risk Appetite

Investors who are willing to stay invested for the long term and can handle short-term market turbulence should invest in NFO. Since NFOs target niche sectors or novel strategies, which may take a long time to perform, they are ideal for aggressive investors with high-risk tolerance and long-term goals.

Investors Exploring New Opportunities

Investors with good knowledge of market dynamics may find NFO interesting to diversify their portfolio with sectors and assets not available in their existing fund. NFOs enhance the potential to boost returns by entering early into evolving investment segments 

Investors Seeking Lower NAV Entry Points

The NAV of NFOs are set at a base price of ₹10, which seems attractive to investors seeking lower entry points. Though an NFO does not guarantee returns, it has the potential for long-term gains if the fund performs well over time. 

Not Recommended for First-Time or Conservative Investors 

Conservative investors prefer predictable and stable returns. Since NFOs lack performance history, they are not suitable for first-time risk-averse investors. They would generally prefer established ULIP funds with a proven performance record.

Conclusion

New Fund Offer or New fund launches could be set up to attract people interested in putting their money in a safe place. Given that the insurance industry comes with various options like standard life insurance, ULIPs, pension plans, and medical insurance, individuals can comfortably opt for an insurance policy they prefer to protect their family and themselves. Learning about the classification, advantages and functionality of NFOs or NFLs in life insurance would enable customers to appreciate their lives and eventually succeed in their financial dreams.

FAQs on NFOs

Q: How do I invest in an NFO?

If you have a variable life insurance plan that invests in ULIPs you can choose to invest in NFOs by confirming the same to your insurance manager, fund house, or online platform.

Q: What is the difference between an NFO and an IPO?

NFOs involve launching new fund option with ULIP and other financial securities, while IPOs (Initial Public Offerings) introduce a company's shares to the public stock market for the first time.

Q: How do I select which NFO to invest my insurance premium in?

The performance of NFOs keeps changing from time to time. It is best to consult a fund manager or financial advisor to select the most suitable NFOs for you. The selection also depends upon your ULIP.

Q. How to apply for an NFO in India?

To apply for an NFO in India:

• Access the official website of the registered fund house or a trading platform.

• Verify KYC with PAN, Address Proof, and Email.

• Choose the amount.

• Select the payment mode.

• Make the payment to complete the transaction. 

• Wait for 5 to 10 days for the allotment to appear in your portfolio.

Q. How is NFO NAV calculated?   

The formula for calculating the NFO NAV is:

Total value of the fund assets/ the number of units held. Most ULIP funds launch their NFOs at a fixed price, i.e., ₹10, which grows over time.