NFO Meaning
A mutual fund house, also known as an asset management company, issues a New Fund Offer, or NFO when they choose to introduce a new mutual funds scheme. This means it is an upcoming NFO in mutual fund scheme that gives investors the chance to purchase a fund at a discount and earn substantial returns.
An NFO mutual funds house can raise the capital needed to buy equities or debt instruments with the help of an NFO. Customers can purchase units from AMCs for INR 10 per unit NAV during a subscription period that typically lasts between ten (10) and fifteen (15) days. On a first-come, first-served basis, AMCs distribute units to investors.
Types of NFO
It is divided into three main types. They are: -
1. Open-ended
Mutual fund schemes that allow traders to invest or redeem at any time are known as open-ended funds. With the ability to participate and quit the scheme at any moment, the open-ended fund offers high liquidity. Additionally, you can buy units of open-ended funds at the current market Net Asset Value (NAV) on any business day, even after the NFO period has finished.
2. Closed-End
It is possible to invest only during the NFO period. These plans have a set duration when they are issued. Subsequent investments in the fund are prohibited after the NFO period. Redemption takes place when all the funds get listed on the share market. All closed-end funds are required by SEBI regulation to be listed on the exchange.
3. Interval Funds
Interval funds combine the best features of both close-ended and open-ended funds.
These funds are classified as closed-ended funds, but they do permit periodic acquisitions and redemptions during the AMC window. These periods can be semi-annual or annual, giving investors the opportunity to transact within a predetermined window of time.
Advantages of NFO
The benefits of the New Fund Offer are as follows: -
- Offer the opportunity to make a small investment when the price of existing Mutual Fund units is higher in a specific industry or on a specific issue, like tax savings.
- NFOs are great if you want to invest in a certain kind of mutual fund for a long time. That is why long-term investors would benefit most from NFO.
- If you believe a certain industry or business will flourish in the future and an AMC introduces that specific NFO, you have an investment opportunity.
- You can get more units through an NFO (SIP) if you were to buy the same later in a flat sum or through Systematic Investment Plans.
- Since NFOs are introduced at the initial offer price, when the fund's value grows over time, there's a chance it will eventually produce larger returns.
How is a Mutual Fund NFO Different from a Company IPO?
Aspect | Mutual Fund NFO | Company IPO |
Purpose | To launch a new mutual fund scheme | To raise capital by providing shares to the public |
Entity | Managed by Asset Management Companies (AMCs) | Offered by companies seeking to go public |
Investment | Investors purchase units of the mutual fund scheme | Investors buy shares of the company |
Risk | Generally lower risk as it pools investments | Higher risk as it depends on company performance |
Performance History | No historical performance is available | A company's past performance may influence investor confidence |
Minimum Investment | Usually lower minimum investment is required | Minimum investment may be higher for IPOs |
Liquidity | Units can be bought or sold at Net Asset Value (NAV) | Shares traded on stock exchanges |
Offering Period | Typically open for a longer period, often weeks | The offering period is usually shorter, around a few days |
Price Determination | Priced at NAV during the NFO period | Price is determined through market demand and supply |
Use of Proceeds | Invested in securities as per the fund's objective | Used for company growth, expansion, or debt repayment |
The Bottom Line
If you want to invest in a recently introduced mutual fund scheme, NFOs are an excellent choice. It provides diversification, cheap initial investment requirements, and the possibility of larger profits. Nonetheless, before investing in an NFO, careful investigation and consideration of a number of variables are necessary. We hope that this introduction to NFO and its features has given you a better understanding of the fundamentals.
