Explained: What is a mutual fund NFO?
Mutual funds are a unique investment tool that gives investors an opportunity to seek capital gains from different sectors and industries. What fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian and foreign economy. Mutual fund investors also have the option of making small monthly investments at regular intervals instead of making a lump sum investment and exposing their entire investment amount to the vagaries of the equity market. Investors also have the option of referring to an SIP calculator where they can get a fair idea about how much they need to invest monthly in order to get closer to their ultimate financial goal.
New Fund Offer, abbreviated as NFO is an introductory offer rolled out by an asset management company. It is a pre launch proposition made available to investors before the mutual fund becomes publicly listed. An NFO is an initiative for the fund house or AMC to purchase securities by selling the new fund’s NAV at discounted rate. An NFO is always available on a first come first serve basis. NFOs are generally close ended offers, they are only available for sale only for a limited period. The discounted price at which investors can purchase fund units is generally set at Rs. 10. Some may even compare an NFO to IPO (initial public offering). However, there are some differences between these two.
What are some of the types of NFO?
NFOs can be categorized as open ended offers and close ended offers:
Open ended NFOs: An open ended NFO is generally the one that is made available for the public to buy and sell the fund’s unit. This is generally after the NFO period is over. Here the units may not be available at discounted rates.
Close ended NFOs: A close ended NFO is a phase when investors can only purchase units of the mutual fund scheme that is newly launched. Also, investors cannot exit the mutual fund scheme till its lock in period is over. Close ended NFOs offer less liquidity as compared to open ended NFOs.
How is an NFO different from an IPO?
When a company wants to expand or wishes to take its wings to international markets, they release an IPO (initial public offering) where it offers shares at discounted rates in order to raise funds for its expansion. An NFO on the other hand, sells mutual fund units at discounted rates in order to buy securities and other assets. Now it is true that the motive of both IPO and NFO is to raise funds, but the purpose is different.
Why should investors consider investing in an NFO?
An AMC launches a new mutual fund scheme with a new vision and a new strategy in mind. By investing, you get to be a part of this new vision and new strategic outlook. New strategies may or may not prove to be beneficial, but if you want to stand an opportunity to benefit from them, then you need to invest in an NFO. NFO investments are flexible in nature. Suppose you invest in an NFO and if the market is in turmoil at the time of your investment, the fund manager can hold onto your investment money and only invest in securities when things become a little normal. Another advantage of an NFO is that the fund units are available at discounted rates to mutual fund investors. They might be able to purchase units at such a low price once the fund goes public.
Investing in NFOs can be a good idea but investors should determine their risk appetite before making an investment decision.