Can NRIs Invest in New Fund Offering (NFO)?

Yes, NRIs can invest in NFO (New Fund Offering) in India through NRE/NRO bank accounts.NFOs are introduced by an Asset Management Company to launch a new mutual fund scheme. It allows investors to purchase a newly launched mutual fund scheme at the base price, typically Rs. 10 per unit. The subscription period for an NFO is generally 10-15 days (up to 30). It can be launched as an open-ended, closed-ended, or interval scheme, and each NFO has a specific investment objective.

A wide range of investors invest in NFOs due to their affordability and also has potential to deliver higher returns. These are handled by professionals and may also help with portfolio diversification. Additionally, IPOs and NFOs are two different investment vehicles. NRIs can invest directly in the AMC, use online mutual fund websites, or even authorize a resident Indian to invest in NFOs. In this blog, we will cover everything you need to know about an NRI's investment in mutual funds (NFOs). 

What is an NFO?

A new fund offering (NFO) is an initial subscription offered by an AMC to raise funds for a newly launched mutual fund scheme. Investors can buy units of the mutual fund at the offer price, typically Rs. 10. Generally, the offer period lasts for around 10 to 15 days (maximum 30), during which you can subscribe directly through the fund house. 

How does an NFO work? 

NFOs allow investors to buy units of a newly launched mutual fund scheme at the base Net Asset Value (NAV). NFOs are launched to raise funds from investors before the scheme is made available for trading. Here is how NFO (New Fund Offer) works:

• The Asset Management Company (AMC) announces a new mutual fund scheme. It includes explaining what the scheme aims to achieve, the risk profile, target investor type, etc. 
• Then, the NFO enters a limited subscription window that usually lasts between 15 and 30 days. During this period, you can purchase units of this fund at a fixed price, typically at Rs. 10 per unit. 
• After the subscription period ends, the offer closes, and new investments are no longer accepted at the base price. Once the NFO closes, the capital raised is collected and given to the fund manager. 
• The fund becomes active from this point on, and units can be bought or sold in the market. Its NAV fluctuates daily based on the performance of invested assets in the market. 

What are the Features of New Fund Offers? 

Here are some of the key features of investing in New Fund Offers (NFO):

• Lower Initial Offer Price: NFO units are offered at a fixed yet lower price, generally as low as Rs. 10. 
• Investment Aim: Every NFO is launched with a specific investment objective, like targeting a particular asset class, sector, etc. 
• Scheme Type: NFOs can launch either open-ended, closed-ended, or interval schemes based on the fund's objective and structure. 
• Subscription Period: NFO's subscription period is generally between 10 and 15 days. AMCs need to invest the proceeds within the specified time duration after allotment. 

What are the difference Between NFO vs IPO?

NFOs and IPOs are not the same investment instruments. An IPO is a company that offers shares to the public for the first time to raise funds. On the other hand, an NFO is a mutual fund that launches new schemes to raise funds. The table below lists the key differences between an NFO and an IPO:

What are the benefits of investing in NFOs?

The following are the benefits that NRIs can enjoy after investing in NFOs:

• Affordability: A wide range of investors invest in NFOs as they are usually offered at a base price of Rs. 10 per unit, avoiding the requirement of high-capital. This low entry cost allows even small-scale or first-time investors to take part in mutual fund investments. 
• Expert-Backed: Each NFO is handled by a dedicated fund manager or investment team that has expertise in portfolio design. It helps the fund perform better according to the current market conditions. 
• Flexibility: Investors are allowed to purchase and sell units as they want after the NFO period ends and the fund is launched. It offers flexibility and liquidity with investment management. 
• Higher-Return Potential: NFOs come with their risks, but they also deliver higher returns, especially if the fund manager has skills and the market conditions are also in favour. 
• Portfolio Diversification: NFOs allow portfolio diversification by adding new funds that target various asset classes, sectors, or strategies. 

How Can NRIs/OCIs Invest in NFOs? 

NRIs/OCIs can invest in NFOs using their NRE/NRO accounts, either through a bank, broker, or AMC. Follow the steps below to invest in NFO as an NRI/OCI:

Step 1: Open an NRO/NRE account

NRIs need to open an NRO/NRE account as mutual fund asset management companies in India don't accept investments in foreign currency.

Step 2: Select NFO and Verify Eligibility

Choose the NFO you wish to apply for and check its Scheme Information Document (SID) to check whether NRIs can invest in it or not. After that, verify whether the scheme complies with the Foreign Exchange Management Act (FEMA) regulations. 

Step 3: Choose Investment Options

NRIs get various options to invest in NFOs, like:

• Applying directly to the Asset Management Company (AMC). 
• Using online mutual fund websites or third-party platforms. 
• Authorize an Indian resident to invest on your behalf.

Step 4: KYC and Payment 

Complete the form by submitting all the required details, like PAN card, a copy of your passport, etc. After that, pay the required amount using cheques/DD/online banking channels. 

Important Considerations for NRIs Before Investing in NFOs

Here are some things that NRIs must consider before investing in NFO:

• Appropriate Bank Account: NRIs must use a relevant account for investing in NFOs, as Indian law doesn't permit AMCs to accept foreign currency. They must either use an NRE or NRO account.
• NFO's Objective: Check the NFO's objective, be it generating income, capital growth, or both. Verify whether it aligns with your financial goals and risk tolerance. Read the entire document to see where the fund aims to invest. 
• Currency Fluctuations: Your investment return may be impacted potentially by currency fluctuations, which you must stay aware of. A weakening rupee can reduce your investment's value when repatriated. 
• Uncovered Market Themes: NFOs often target uncovered areas, like niche sectors, emerging markets, or newly growing investment trends. It can be a good future-focused opportunity for those who are otherwise inaccessible via regular funds.

The Bottom Line

Investing in NFO as an NRi/OCI offers a unique opportunity and offers access to new emerging market trends. Investors can gain long-term returns by choosing the right fund that targets promising sectors or NFO themes. Apart from the affordability, high-return potential, and other benefits, NFOs carry some risks as well. Investors need to verify all the scheme documents to ensure the NFO aligns with their investment goals. 

Additionally, to make a smart investment choice and ensure compliance with the FEMA regulations, consider seeking assistance from an expert at Savetaxs. At Savetaxs, we have an entire team of experts who have years of knowledge and expertise with NRI-related matters, including taxation, investment, repatriation, banking, finance, and more. They can help you make the smart and right investment decision that aligns best with your goals. Connect with us right away, as we are working 24/7 across all time zones.