A Guide on NFO

A Guide on NFO

Finance

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In a new fund offer (NFO), an investor can subscribe to a new fund’s units. A fund creates new units when it issues new fund offers.

Read on to know more about new fund offers.

A fund company launches a new fund offer in order to raise capital to purchase securities like government bonds, shares, etc. from the market. A new fund offer is a process by which a fund company launches a new mutual fund.

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Often, many investors get confused between a new fund offer and an initial public offering (IPO). While an NFO is the initial offer of a mutual fund scheme’s units, an IPO is the sale of the shares of a company before it gets listed on the stock market. In simple words, in an NFO, investors are offered fund units, whereas, in an IPO, investors are offered a company’s shares.

An IPO is dictated by a company’s fundamentals. It can be priced below or above the stock’s real value. The listing price of the stock then gets impacted by the market. However, a mutual fund’s pricing is dictated by its market value. An NFO collects money from investors and invests it in securities depending on a stated strategy.

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The most common type of NFO is mutual funds. New fund offers can be issued for closed-ended and open-ended funds. Investors can subscribe to a new fund offer within a stipulated time period. Investors may buy a new fund offer unit of a mutual fund scheme at an offer price. However, after the NFO period, the fund’s units can be purchased at the prevailing NAV.

Types of NFO

  • Open-ended Funds

Once the NFO ends, an open-ended fund is officially launched. Investors can enter or exit the fund whenever they want after the launch. This fund is created by acquiring another fund’s schemes or by an initial NFO.

  • Closed-ended Funds

After the NFO period,investors can’t enter or/and exit a closed-ended fund,until its maturity. Generally, these funds come with a lock-in period of 3 to 5 years.

Things to Keep in Mind Before Investing in an NFO

  • Investing in an NFO can bring in additional risk. This is because NFOs are launched for new funds that have no track record of performance.
  • A few important factors that should be considered are asset allocation, expected returns, etc.
  • If an NFO doesn’t fit into an investor’s investment objective, then he/she should not buy that NFO.
  • It is extremely crucial for investors to check the track record of the fund house.
  • The investor must understand the offer document. Also, he/she should know the investment process followed by the fund manager.
  • It is of utmost importance to consider the returns aspect as NFOs are launched without any track record.
  • Every investor must read the prospectus of a new fund offer. This document can answer questions that investors might have. The prospectus will also list the types of securities the fund is planning to invest in. An investor can also find out the returns expected in this document.

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