When it comes to mutual funds, you might often come across the term NFO, which stands for New Fund Offer. Understanding NFOs is crucial for both new and experienced investors looking to diversify their portfolios or capitalize on fresh investment opportunities. So let’s understand, what is NFO and how does it work?
What is NFO and How does it Work?
In India when an asset management company floats a new mutual fund scheme it is called New Fund Offer or NFO for short. This is a time of interest for the company as well as interested investors, because an NFO is similar to a new product launch for a mutual fund company; it gives the opportunity for the company to introduce and market its new fund to the public.
In the course of NFO in mutual funds, all the relevant information pertaining to the fund is communicated to the public. This includes the portfolio form – the structure of the fund that defines what kind of investment the fund will contain, what securities it will purchase and, finally, the fund manager.
With this information it can enable a potential investor to understand the fund, the kind of investment it offers and whether it fits the investor’s preference and risk taking abilities.
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Funds need to be raised or new funds floated in the market so the NFO is the way through which AMCs can mobilize capital. It is one of the stages in the mutual fund marketing plan and it plays a crucial role in the marketing of a new mutual fund scheme to create awareness among the targeted investors.
In general, an NFO in mutual funds is as close to an IPO as anything, since it gives a company a fresh chance to launch a new product into the public domain. In the case of New Fund Offer though the company is floating a new mutual fund scheme and not a new stock offer.
What happens during a New Fund Offer (NFO)?
NFOs are normally open for a maximum period of 30 days in which investors can buy units at the offer price typically Rs. 10 per unit. These could be open-ended schemes that may accept money round the year or closed-ended schemes where once they are launched, the offering is closed.
After the NFO period is closed, mutual fund units are bought and sold at the prevailing Net Asset Value (NAV) of the fund. Investing during the NFO period is also advantageous to the investors because the units of a mutual fund can be purchased at a cheap rate. This can lead to substantial profits in the future, especially when the mutual fund starts trading in the open market.
Types of New Fund Offer
1. Closed-Ended Funds:
These include funds that are associated with a fixed corpus which are pooled through NFOs. After the subscription period has elapsed, no addition is allowed to the portfolio no matter what. These are like ‘special series’ of funds. After the NFO period, it becomes locked and you are no longer able to purchase any of the units.
The NAV of the fund is calculated with reference to the number of issued units as compared to the total value of the assets. The buying and selling of mutual fund units must be effected through a market exchange in the same way as shares since they will be listed in the market.
The NAV units are exchanged at the market price determined by the forces of demand and supply in the market and therefore an opportunity to trade at NAV premium or even NAV discount.
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For instance, ABC Mutual Fund which Mr. Subhash is interested in, he invests during the NFO period buying 100 units at Rs. 10/- per unit, the NAV at the beginning of trading will be Rs. 12/- per unit, thereby giving an investment value of Rs. 1200/-. On the other hand if the NAV reduces to Rs. 8 per unit, ABC Mutual will be available at discount to its NAV price and thus the business incurs a loss when it sells.
2. Open-Ended Funds:
Open-ended funds are not linked to any specific amount of money as the case is with closed-ended funds. These are usually variable in the number of units as they depend on the efficiency of the demand. This will make sure that people are able to subscribe for units even after the NFO period has been closed. They cannot purchase these for any random price but people have to purchase the units at the current NAV when the fund begins to trade.
For example, if Sonali invests Rs. 500, acquiring 50 units in an open-ended mutual fund during its NFO, and thereafter the NAV is Rs. 20 per unit, she can sell her units at Rs. 1000. Both open-ended and closed-ended funds provide opportunities for investment, with the former usually actively managed by portfolio managers and the latter passively managed to mirror benchmark index returns. goes.
Benefits of NFO
An NFO is a non-convertible fund offer which is floated to the public by fund houses to mobilize funds for the purpose of investing in the securities such as equity shares and bonds. NFOs are relatively cheaper products as they are quite commonly priced cheaper than existing popular MFs; this is because they are newborns in the market – in most cases they are very young products in the market among the competitors’ products .
They also give a clear direction on investment objectives and on the amount of return to expect. However, the investors are required to research well and invest their hard-earned money wisely only. To some extent some of the following points may be elaborated in details.
- Expense Structure: Low cost: Generally and ideally, at the New Fund Offer phase of the plan, there are no expenses involved. However, when the scheme has been set out the expenditure and expenditure ratio will be relevant.
- Accessible entry points: NFO units are generally offered at a particular price range; the common price being Re. Rs. 10/-. This has the effect of making them affordable to investors who wish to begin with a small cash base and thus can begin with a small amount.
- Potential for better returns: Nonetheless, if well managed and in line with your financial goals, it is possible to gain better returns as the fund increases with time, of an NFO in mutual funds.
- Unique investment opportunities: Some NFOs have new or different fund themes, and therefore the investment allows the investor to have exposure to more niches than otherwise.
- Long-term growth prospects: Realizing any given objectives in the management of the Fund and ensuring that the funds received correspond to your financial goals, the purchase of NFOs offers long-term growth as the company develops.
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How to invest in NFO
It is convenient to invest in NFOs, and one can either approach an intermediary – a stock or share broker, over the internet using trading platforms to invest in NFOs, or approach Kartikey Traders and experience the best services.
Conclusion
NFOs are very attractive in the provision of new opportunities of investment but they have to be managed wisely. This essentially means that if you have assimilated with the basics that have been explained and did your research well, you can in right and informed conscience decide to be part of NFOs. Note that here at Kartikey Traders, we would be ready to guide you on appropriate decisions on the NFO investment plans.
What is NFO in Mutual Funds: Meaning, Types, and Benefits