NFO - New Fund Offering

NFO stands for News Funds offer. Whenever an asset management company coming up with a new mutual fund in the market can raise capital for the same by announcing a new fund offer (NFO). Its kind of similar to the concept of an initial public offering (IPO), significant details of the portfolio company shares to the purchased, what kind of securities to be procured, who is the fund manager, etc. are incorporated in such new fund offers.

Investors can purchase units of a mutual fund at the subscription price, usually set at Rs.10 per unit, through such offers. Both open-ended and closed-end funds are launched via new fund offers for a limited time period, post that such mutual funds are traded in the market based on their corresponding net asset value (NAV).

What is NFO & How does it work?

As per SEBI regulations, for a maximum of 30 days, NFO can remain active in the market. Offer price to subscribe to such mutual funds is ₹10, and the collected revenue can be utilised in procuring securities of various publicly traded companies listed in a stock exchange.

After a new fund offer closes, any trade of a respective mutual fund has to be done based on the NAV (Net Asset Value) of the fund. While subscribing to a mutual fund through new fund offers is profitable, as investors get access to respective units at comparatively a nominal cost. Hence, profits realised at a later date are substantial, allowing individuals to realise immense capital gains once the mutual fund starts trading in the open market.

Types of New Fund Offer

There are three types of NFOs (New Fund Offers):

• Open-Ended New Fund Offer (NFO): Open-ended new fund offers are issued to accumulate an initial corpus to purchase shares for the mutual fund unit. An open-ended new fund offer (NFO) does not resist the number of shares that can be issued when the NFO is live. During that period, and after it expires, the investors have no restrictions on making subsequent purchases and redemption requests. Such NFOs do not trade on an exchange but are managed by the AMC or its associates.

• Close-Ended New Fund Offer (NFO): Close-ended new fund offers to restrict the number of shares as they issue only a specified number of shares during the NFO. These types of NFOs are the most highly marketed new fund offers, trade on a stock exchange, and are associated with daily quotes throughout the trading sessions. Close-ended NFOs allow the entry of investors only when the NFO is live. Once the NFO mutual fund expires, investors can not buy new units or make redemption requests.

• Exchange-Traded Fund: Currently, Exchange-Traded Funds are also launched through the issuance of a New Fund Offer (NFO). Exchange-Traded Funds are a type of mutual fund created to track the performance of a specific index such as Sensex, NIFTY 50, NIFTY Next 50, NIFTY Bank, etc. Exchange-Traded Funds launched through an NFO also trade on the stock exchanges and come with no buying and redemptions restrictions.

Things to Consider before Investing in NFO

NFOs and upcoming NFOs can excite investors as they can realise good profits. However, similar to shares, not every NFO can provide hefty gains to the investors and may force them to lose out on the value of the invested capital. Hence, it is vital to understand the factors that should be considered before investing in an NFO:

• AMC’s Goodwill: History of Asset management company influences early traction toward the upcoming NFO. While issuing a new fund through an NFO, the funds previously issued by the AMC are available in the market with information on their financial performance. Analysing the reputation and goodwill of the AMC based on the performance of previous funds can become an effective factor before investing in the NFO.

• Objectives: The objectives of the NFO mutual fund provide vital details about the risks, expected returns, asset allocation, liquidity etc. Before investing in a new fund offer, investors should consider the motive behind the fundraising and the fund manager’s purpose for using the money. Only when the objectives are clear that an investor should apply to the upcoming NFO.

• Expected Returns: Before investing in a NFO, investors should compare the potential returns of various similar funds that are currently trading in the market. It can allow for an effective understanding of the returns that the NFO can provide to the investor. They can also consider investing in the NFO mutual fund if the return potential is ideal.

How to Invest in NFOs with 5paisa?

5paisa is one of the leading brokerage firms in India and is a one-stop solution for all trading and investing needs. Follow the below steps to invest in a New Fund Offer with 5paisa.

• Login to your 5paisa Account. If you do not have an account, you can create a new one in 3 easy steps!
• Once you have logged in to your account, search for your preferred mutual fund scheme or explore “All Mutual Funds”. 
• Select the best NFO mutual fund according to your criteria. 
• On the fund page, you can read all the additional information about the NFO mutual fund, such as fund managers, holdings, asset allocation etc. 
• Select the investment type – SIP or Lumpsum for the New Fund Offer you have chosen. 

Proceed with Payment. Once you have completed the payment, you will receive a confirmation text and email from 5paisa confirming that you have successfully applied to the NFO.