Investing in mutual funds during a New Fund Offer (NFO) can be an exciting opportunity for investors, especially when a fund house introduces a new scheme. One such feature that benefits investors during the NFO period is the Auto Switch Facility. This article will explain what this facility is, how it works, and how you can utilise tools like a SIP calculator to calculate SIP returns when investing in NFOs.
What is an NFO?
A New Fund Offer (NFO) is when an asset management company (AMC) launches a new mutual fund scheme for the first time to the public. Investors are invited to subscribe to the units of the scheme during this initial offering, often at a fixed price of Rs. 10 per unit. NFOs are generally launched to raise capital for investing in the market as per the scheme’s investment objectives, whether in equity, debt, or hybrid options.
NFOs are attractive for many investors due to the potential of getting into a scheme at a lower unit price. However, the risks associated with NFOs should not be ignored, as the fund does not have a track record. This is where the Auto Switch Facility comes into play, providing investors with added convenience and flexibility.
What is the Auto Switch Facility?
The Auto Switch Facility is an investment feature provided by mutual fund houses during the NFO period. It allows investors to automatically transfer their investment from an existing scheme into a new one. The idea behind this facility is to provide an easy way for investors to switch between funds without having to redeem their existing units and reinvest the money manually.
In other words, if you are already invested in a particular mutual fund scheme and the AMC introduces a new scheme through an NFO, the Auto Switch Facility enables you to move your investment into the new scheme effortlessly. It eliminates the hassle of manually withdrawing and reinvesting funds, and often ensures that the transfer occurs at a more advantageous time.
How does the Auto Switch Facility work?
Here’s how the Auto Switch Facility works during the NFO period:
- Selection of source fund: As an investor, you choose an existing mutual fund scheme from which the switch will be made. This can be any open-ended fund that you are currently invested in, such as an equity, debt, or hybrid fund.
- Setting the switch instructions: You provide instructions to the AMC to automatically switch your investment from the chosen source fund to the new scheme during the NFO period. This typically involves filling out a switch form or doing it through the AMC’s online portal.
- Automatic transfer: Once the switch instructions are set, the AMC will execute the transfer during the NFO period without you needing to take any further action. The amount you choose to switch will be redeemed from your current scheme and reinvested into the new scheme at the NFO price (usually Rs 10 per unit).
- Unit allocation: After the NFO subscription period ends, units are allotted in the new scheme based on the amount you switched, following the NFO price.
Advantages of the auto switch facility
- Ease of investment: The Auto Switch Facility allows you to easily transfer your investments to a new fund without having to go through the manual process of redemption and reinvestment.
- Time-saving: Instead of closely monitoring the NFO period and manually managing the transfer, you can set up the auto switch and let the system handle the process. This is especially useful for investors who may not have the time or expertise to manage the switch themselves.
- Avoid missing out: NFOs are time-sensitive, and manually switching between funds could cause you to miss out on potential gains if the market moves favourably. With the auto switch, you ensure that your money gets invested in the new scheme during the NFO period.
- Tax efficiency: While some switches may trigger capital gains tax, the Auto Switch Facility can still help you manage your investments more efficiently, especially in cases where it helps to optimise your portfolio or align with your long-term financial goals.
Disadvantages to consider
- Capital gains tax: The switch from one scheme to another is considered a sale and repurchase for tax purposes, meaning that you could incur capital gains tax, especially if you’re moving from an equity fund to another equity or debt fund.
- No track record: Since NFOs do not have a past performance history, there is an inherent risk. While established funds provide a track record, NFOs rely on the promise of future returns based on market conditions and the fund manager’s expertise.
Calculate SIP returns from NFO Investments
Investing in an NFO can be exciting, but it’s important to have a clear understanding of potential returns. For those opting for Systematic Investment Plans (SIPs) in the new scheme post-NFO, tools like the SIP investment calculator can help calculate SIP returns.
A SIP calculator allows you to input factors such as:
- Monthly investment amount
- Expected rate of return (based on the historical performance of similar funds)
- Investment duration
For instance, if you plan to invest Rs. 5,000 per month for 5 years with an expected return of 12%, the SIP calculator will show you the potential future value of your investment. This tool is invaluable for planning your investments and understanding how much your NFO-related SIP could grow over time.
Conclusion
The Auto Switch Facility during the NFO period can be a beneficial tool for investors looking to diversify their portfolios or move from existing funds into a newly launched scheme. It simplifies the process, making it more convenient for investors, especially those with multiple funds or less time to actively manage their portfolios. By using tools like the SIP calculator to calculate SIP returns and comparing options from leading AMCs, investors can make informed decisions about whether or not to participate in an NFO.
For new investors or those looking to diversify, this feature offers an easy and efficient way to tap into the growth potential of newly launched schemes. However, it’s essential to consider the tax implications and the risks of investing in a scheme with no performance history before making any decisions.
