NFO – All about New Fund Offer (NFO) in Mutual Funds

Fund raising is an important aspect of financial planning for any company. There are many ways through which a company can raise capital from the market. However, in the case of an Asset Management Company, they can raise the capital through New Fund Offer (NFO). In this article, you will learn all the important details about NFO and its related concept.

Let us begin by learning NFO meaning.

What is NFO?

When an Asset Management Company launches a fund, a New Fund Offer is launched to raise capital in order to purchase securities. The securities include equity and bond. During an NFO, mostly new mutual fund schemes are launched. NFO is similar to IPO expect for the fact that it is launched by an Asset Management Company. The NFO remains open for a specific period of time and the investors can apply for it during the stipulated price. On conclusion of the NFO period, the investors get the funds at the prevailing Net Asset Value (NAV) of the fund.

Many times investors get confused between an NFO and IPO. In this section of the article, we will clear all your doubts regarding the same.

Difference Between NFO and IPO

Since IPO and NFO both aim to raise money, the investors often get confused between the two. A company brings IPO to raise capital for improving its operational efficiency. On the other hand, an Asset Management Company brings NFO for purchasing the stocks of the company, commodities, bonds, etc. The price of the IPO is much higher than its face value. But in the case of NFO, the fund's price is Rs.10 per unit in general.

Let us now learn about the types of NFO.

Types of NFO

A New Fund Offer is of two types;

Open-Ended Funds

As the name suggests, the investor can enter or exit the open-ended fund at any point in time after its launch. These funds are launched when the NFO ends. When there is a New Fund Offer, the open-ended funds announces the purchase of new units on a specific date. You can purchase any number of units of these funds. The NAV of the open-ended mutual funds is reported regularly after the closure of the stock market.

Close-Ended Funds

A close-ended fund is one that does not allow you to make an entry or exit after the NFO period is over. They have a fixed maturity period that ranges from 3 to 4 years from the launch date. Theoretically, you can buy or sell these funds in the market, but it is not possible to do so because of lower liquidity.

Let us now learn about the advantages of investing in NFO.

Advantages Of Investing In NFO

Close-ended funds provide you with the opportunity to invest in new and innovative products that are not available in the case of other funds. The close-ended funds come up with hedging strategies that protect you from the downside in the market by using the put options. However, being a close-ended fund, you can invest only when the NFO period is open.

The close-ended NFO mutual funds often outperform other investment avenues. This is because when an NFO is launched during the peak of the market and you invest in it, the fund manager has the authority to hold the funds and invest when the markets are favourable or more attractive.

Since close-ended NFO mutual funds have a lock-in period, the fund managers are not required to sell their stocks out of panic leading to losses to the unitholders. The fund managers in close-ended funds have the time to carry out research for stock selection and accordingly invest in securities.

The lock-in period of NFO immunes the investors from market panic. With a lock-in period in place, the investors would not fall for bad investment decisions. Therefore, as an investor, you would make higher returns in these funds as you remain in the market for the long term.

Since there are many advantages of investing in the NFO, you must select it carefully. To help you with the NFO selection, we list down certain points that you may follow.

Things to Consider Before Investing in NFO

You must make a background check of the fund house. You must ensure that the NFO has a positive history of mutual fund investments and has the potential to offer good returns in the long run.

Before selecting any fund for investing, you must read about the risk, returns, allocation of the asset, etc. of the NFO.

Always make sure that you read the offer document carefully and understand the fund manager’s investment process.

The minimum amount for NFO subscription ranges from Rs. 500 to Rs. 5,000. So choose your funds accordingly.

Some of the NFOs have a lock-in period. So invest in them after considering that factor.

The above mentioned are a few things to consider before investing in New Fund Offer. Investing is all about selecting the right avenues and making good returns in the long run. If you are a beginner in the market or seek any assistance in investing, you can contact IndiaNivesh. We understand your financial needs & goals and accordingly suggest the right investment option for you.

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.