A New Fund Offer (NFO) is an introductory mutual fund scheme that a fund house launches. NFOs function like Initial Public Offerings (IPOs); with the help of NFOs, the fund houses will generate the initial capital for buying securities that are in sync with the fund’s objective.
An NFO will be open for a specific period during which you can invest in the scheme at an offer price. NFO price in India concerning mutual funds is mostly fixed at Rs 10 per unit of the scheme. After an NFO period expires, new or existing investors will buy units of the scheme at an allocated price, which is mostly more than the NFO price.
What are the types of NFOs?
- Open-ended fund: Here, you will be able to withdraw the invested amount whenever you need it.
- Close-ended fund: Here, your invested amount will remain invested for a specific period until the end of the maturity period. This period is generally three to five years from the date of launch. You will not be able to withdraw the amount whenever you want to. As an investor, you need to look at investing in this fund only when offered a completely different fund compared to a normal open-ended fund.
Why invest in NFOs?
- There could be a notable difference between the Net Asset Value (NAV) and the NFO price. This difference sometimes could be advantageous.
- In the case of close-ended NFOs, a lock-in period will be applicable. Hence, your investment will be disciplined and, thus, increases the potential of your returns.
- Several Asset Management Companies (AMCs) are now introducing innovative mutual funds schemes. For example, a few schemes particularly invest in recently-listed IPOs and stocks. A few schemes with the help of hedging strategies churn better returns for you. With NFO, you will get access to invest in such funds even before accessible to other investors.
Factors to consider before investing in NFOs
NFOs can deliver high returns; however, not every NFO might be capable of being highly rewarding. It would help if you considered a few factors before opting for an NFO investment:
- The fund house’s reputation
- The objectives of the fund and the investment
- Returns potential of similar funds that are available in the market already
- Lock-in period when you want to opt for close-ended funds
In case you are a risk-averse investor, NFOs might not be an ideal choice for you. This is because the historical performance of an existing mutual fund scheme can easily be verified before making an investment decision. In the case of NFOS, you will not get any historical data.
Always make sure to read the NFO’s fine print thoroughly and match the fund’s objective with your investment profile so that you ensure to make the right decision.
For any clarifications/feedback on the topic, please contact the writer at bhavana.pn@cleartax.in
Bhavana is a Senior Content Writer handling the GST vertical. She is committed, professional, and has a flair for writing. When away from work, she enjoys watching movies and playing with her son. One thing she can’t resist is SHOPPING! Her favourite quote is: “Luck is what happens when preparation meets opportunity”.
