NFO: New Fund Offer - Meaning, Benefits, Types and more

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New Fund Offer

New Fund Offer or NFO is a way through which a fund house or an asset management company launches a new mutual fund scheme. It is similar to an IPO, through which a company gets listed. Just like the IPO helps the company to raise capital, NFO allows the fund house to collect funds from investors and invest in securities like equities, debts, etc. While launching an NFO, the company also presents relevant details for the investors like the types of securities to be purchased, fund manager, investment aim, etc.

Things to Note about NFO

  • NFO full form is New Fund Offer
  • NFO helps asset management companies to raise capital for the mutual fund
  • Both open-ended and closed-ended funds can be launched as NFO
  • Units in an NFO are offered at nominal rates, usually at Rs 10
  • NFOs are used to launch both open-ended and closed-ended mutual funds
  • As per SEBI prescribed rules, NFOs can remain open for subscription for a maximum of 30 days

What Happens After NFO Closes?

An asset management company can offer an NFO subscription for only up to 30 days, which is the maximum limit set by SEBI. The offer price for an NFO’s subscription is usually set at Rs 10. This allows investors to own fund units at a very low price. When the NFO closes, the mutual fund units will start trading at a price based on the fund’s Net Asset Value (NAV). This raises the price of the units substantially and enables investors to realize healthy gains on their holdings.

Types of NFOs

NFOs can be broadly categorized based on the type of mutual fund which is being launched, i.e; close-ended funds, and open-ended funds.

Close-ended Funds NFO

Close-ended mutual fund schemes have a fixed corpus. The number of units of the fund remains the same even after the NFO’s subscription ends. Although the units in an NFO are offered at a discounted price, the NAV of the fund is calculated based on the number of units and the total value of the underlying assets. Further, the market price of the units is decided on the basis of the overall demand and supply. This is the price at which the units are traded in the market. The market price also shows whether the units are being traded at a premium or discount. If the market price is greater than the NAV units’ price, it is considered to be traded at a premium, whereas if the market price is lower than the NAV units’ price, the units are said to be traded at discount.

Market Price > NAV PricePremium
Market Price < NAV PriceDiscount

Open-ended Funds NFO

Unlike close-ended mutual funds, units in open-ended funds are not fixed, instead, they keep fluctuating based on the underlying demand. The units of the mutual fund are offered at a nominal price with the launch of its NFO. Investors can own these units at a lower price and can make decent profits when the NAV of the mutual fund is decided after it goes live. Similarly, whether the units are traded at premium or discount is determined by the market price of mutual fund units, i.e. whether it is higher or lower than the NAV price respectively.

Why Should One Invest in NFO?

  • NFO allows a fund house to launch a new mutual fund scheme and raise funds to invest in equities, bonds, and other financial instruments. It comes in the form of a launch offer where the fund house offers units at a much lower price than the actual NAV price. Once the mutual fund goes live, the units start trading at a price calculated based on the NAV, which is higher than the offer price. This allows investors to enjoy higher gains when the NFO ends and the fund units start to trade at a higher price according to the fund’s NAV.
  • However, you should always do proper research before investing in anything, even though it is an NFO. Asset management companies invest a lot of money in marketing NFOs to create hype and attract investors. Thereby, it is recommended to go through all the necessary details like securities that are to be procured from the raised funds, launch objective, etc., before making any investment decision.

Things to Keep in Mind Before Investing in NFO

Make Sure You are Getting Something New

Investing in an NFO should not only come with the aim to earn from a lower offer price and higher NAV price. If you are planning to start an investment journey, NFOs can serve to be a less expensive option. However, your goal should be to remain invested for a longer period. Hence, learn the NFO’s objectives, strategy of investment, etc., and check whether there is something new which you cannot get from the existing mutual fund schemes. 

Evaluate Risks

Since NFOs are launch offerings of new mutual fund schemes, they do not have any performance history. Hence, it is very difficult to analyze the returns that can be expected from the mutual fund. You cannot predict whether the fund is going to perform well or will fail when it goes live. However, you can check a few details to gauge the future performance of the fund. The two most important details are - the fund manager and the investment plan. Try to check out the history of the fund manager, i.e; how well the past funds have performed under the management of the fund manager. Know the investment plan that explains where and how the funds are going to be invested, how the sector is performing, and its future prospects.

Choose Wisely Between Open-ended and Close-ended Mutual Funds

Always frame a proper investment goal before investing in any NFO. If you wish to stay long by trusting that the mutual fund scheme will perform well in the future, you can opt for the close-ended mutual fund NFO. On the other hand, if you want to avert risk and keep the option to exit early from the scheme, always opt for an open-ended fund NFO. 

How to Invest in NFO?

Investing in NFO is as easy as investing in a mutual fund scheme. You need to follow only a few basic steps to start your investment journey with an NFO.

  1. Check the NFOs that are open for subscription
  2. Check the minimum subscription price. It usually ranges from Rs 500 to Rs 5,000
  3. Pay the required amount and wait for the mutual fund to get live
  4. The units will be allocated and will be available to trade once the fund is live

NFOs offer a great opportunity to invest in a new mutual fund scheme at a minimal price. They allow you to explore new investment opportunities and earn higher returns easily. However, NFOs, unlike existing mutual funds, lack performance history. Hence, you should invest only after doing proper research.