What You Need To Do After NFO Withdrawal
An NFO needs to get a minimum amount of subscription to be successful and continue as a running fund.
There are now several instances where mutual funds have pulled back or withdrawn their new fund offers. This has been witnessed mainly in the debt space, where the changed circumstances related to the tax laws on debt-oriented funds has impacted the way in which investors are treating the new offerings from mutual fund houses. What is important is that investors understand the implication when such a situation occurs and what this means for their money.
Withdrawal Of NFO
An NFO needs to get a minimum amount of subscription if it has to be successful and continue as a running fund after the initial period is over. The amount that needs to be collected depends on the nature of the fund. For example, a debt fund needs to collect a minimum of Rs 20 crore.
There is a specific time period for which the NFO is open and during this period, the investors have the chance to put their money into the fund. This is the reason why a longer time period for which the NFO is open gives time for the marketing efforts to succeed and get more investors into the fund.
Sometimes, when the initial response to the NFO is poor and the laws allow it, the fund house will try to extend the NFO period. However, this also has to be considered from the side of the investor and they have to invest only when it makes sense for them, in terms of their requirements and use.
In some recent examples during the first few weeks of April 2023, many of the NFOs have not been able to collect the minimum amount of investment from the investors and hence, have decided to pull the plug on the offer and not go ahead with it.
The meaning of the NFO being withdrawn is that there will not be the continuation of the fund after the NFO period. Normally, the initial period gets some investments and then the fund starts its journey as the holdings then rise and fall in value and if it is an open-ended scheme, then investors can enter and exit the fund, impacting the size of the fund.
However, the moment the NFO is pulled, then the fund does not start its operations at all because all the money that has been collected will be returned to the investors and there will be no fund in existence. This is crucial because the fund will not be present at all and hence, there is no question of an investment opportunity for the investor even later on.
Alternatives For The Investor
If you were an investor who had invested some amount in the NFO that has been pulled out or were planning to invest some amount later on, then the first thing to do is to search for alternatives.
There should never be a compulsion to invest in just a specific NFO, unless this is a different and unique fund. There has to be a deployment of the funds that were meant for this area into some other fund and this has to meet your specific needs and requirements.
This is a crucial aspect that has to be met because searching for the alternative will ensure that the investor's plans are not disrupted or that they do not end up without getting the exposure that they wanted.
The market conditions that are present might lead to the situation where the NFO might have to be pulled out. There might not be enough investor interest for a particular kind of fund that could result in this situation.
The other position would be where there is a deterioration in the overall sentiment due to some capital market problem and hence, the investors might want to stay away.
This is likely to be the case in many of these instances as the investors might not have the required confidence to undertake the investment. It could be that after a period of time, there is an improvement in the overall conditions and the investor interest actually comes back but this can take some time. Meanwhile, the entire NFO process would have to be done again by the mutual fund house.