If you’re new to investing, you should get familiar with mutual fund jargon. This would help understand the market better, which could later translate to better investment decisions. A New Fund Offer or NFO mutual fund is one such investment option that is gaining preference among investors today.
If you are new to this term, this blog will help you with a comprehensive idea of NFO, how to invest here and its benefits.
What Is a New Fund Offering or NFO?
When an asset management company or mutual fund house launches a new mutual fund scheme, the process is called a New Fund Offer or NFO. During this process, a mutual fund house raises money by inviting interested investors to invest in different assets of this new scheme.
However, SEBI strictly prohibits fund houses and AMCs from issuing NFOs in identical assets. Regarding what is NFO, you must also note that, unlike Initial Public Offerings, NFO is launched by AMCs and fund houses to introduce a new fund idea to investors.
For instance, Groww Mutual Fund which was previously known as Indiabulls Mutual Funds will soon launch Groww BFSI Fund NFO. This is an open-ended equity scheme which will focus on investments in banking and financial services-related sectors. This NFO will be open for subscription from January 17, 2024, and will close on January 31, 2024.
How Does New Fund Offer Work?
Now that you have some idea of the New Fund Offer meaning, let us take you through how NFO works.
To know the workings of NFO mutual funds, you must first know that AMC provides a window of NFO open and close dates within which you can subscribe to units of this scheme. During this time, as an interested investor, you can make a subscription at a nominal price of Rs.10 for each unit.
After this window closes, the AMC or fund house launches the NFO mutual fund scheme officially. Following this, investors can now buy, sell or trade their securities in the secondary market at their Net Asset Value.
These NFO mutual funds also house professional fund managers who monitor the stocks’ performance. They also allocate the capital raised during the subscription period to different assets depending on the mutual fund’s goals and objectives.
Most importantly, the NFO process allows investors to invest early in a relatively new mutual fund with a low investment amount. However, it is crucial to note that NFO investments involve high risk and you must conduct thorough research before investing here.
How to Invest in NFO Mutual Fund?
The procedure for how to invest in NFO is quite simple and you can invest here using either online or offline methods. Let us take a look at the processes to invest in NFO.
- Online Trading Method
This method of NFO mutual fund investment is best for seasoned investors. For this, you must have a Demat account through which you can directly subscribe to open NFOs.
All you need to do is log in to the trading platform of your depository participant. Then navigate to NFOs and enter your investment amount and tenure to subscribe. The trading platform will ask you to fulfil certain e-KYC formalities which will not take much time. Once done with the KYC procedure, you can choose from any of the open NFOs to complete a subscription.
- Offline Method with Broker
Opting for a broker’s assistance is the most straightforward method for NFO investment for both seasoned and novice investors. You can opt for a professional broker to help you through the investment process. If you are a new investor, a broker can also help you choose the right NFO mutual fund and decide the amount that can bring you better returns while assessing your risk appetite.
What are the Types of NFO?
Here are the types of New Fund offers that you must know before going ahead with the investment process.
- ETFs
Very often AMCs and fund houses introduce Exchanged Traded Funds through NFO. In this type of mutual fund, you can openly trade its units in stock markets. Furthermore, with ETFs, you can invest in different securities like bonds and equities and focus on portfolio diversification.
- Open-Ended
True to its name, these funds are always open for investment and redemption. This means that once your NFO period is complete, you can join or exit from this mutual fund scheme as per your will.
- Close-Ended
Unlike open-ended mutual funds, a close-ended mutual fund scheme does not allow you to enter or leave the scheme after the completion of the NFO period. Under this type, you are free to redeem your assets only after the completion of the maturity period which usually ranges from 3-5 years.
What Are the Benefits of NFO?
The points below will take you through the advantages and disadvantages of NFO for a better idea of this mutual fund.
- Low Expense Ratio
An NFO mutual fund carries a comparatively low expense ratio as it is newly launched. Consequently, investing in an NFO will be less expensive than already existing mutual fund schemes trading in the market.
- Flexibility
In terms of timing, NFO mutual funds bring flexibility for both investors and AMC, especially in the case of close-ended NFOs. If an AMC finds the present market trend is not suitable to trade, it can hold the investor’s fund with the fund manager’s assistance and commence trade once the risk of loss subsides.
- Unique Investment Goals
Some fund houses or AMCs come with specialised and innovative themes to meet unique and emerging investment goals. Thus, with unique themes, NFO allows investors to diversify their portfolios in the best way to cushion against major losses.
- Professional Management
Like regular mutual fund schemes, NFOs are also managed by professional fund managers who invest, redeem, and reinvest funds from investors to different assets as per market movement. By doing so, they help investors like you to meet your investment goals.
The Bottom Line
To conclude, while investing in an NFO mutual fund, you must remember that a single investor cannot hold more than 25% of a scheme’s corpus. This helps fund houses to keep NFO open for a large group of investors and not among selected ones.
Also, as an interested investor, you must consider researching the NFO scheme’s objective, its past performances, and its fund manager to make an informed decision.
