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NFO (New Fund Offer)

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. ...Read More

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Demystifying NFOs: Meaning, Types, Benefits, and Functionality

Demystifying NFOs: Meaning, Types, Benefits, and Functionality
March 15, 2024

Table of Content

 

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 

    2. 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 

    3. 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

    4. 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.

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?

A: 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?

A: 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?

A: 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.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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Disclaimer

In unit linked policies, the investment risk in the investment portfolio is borne by the policyholder. The Unit Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender/withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of fifth year.

Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. The name of the company, name of the brand and name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your insurance agent or the intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns.

^ Please note all the tax benefits are subject to tax laws prevailing at the time of payment of premium or receipt of benefits by you. Tax benefits are subject to changes in tax law.

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