New Fund Offer (NFO)

Investing in a diverse portfolio is vital for any investor. It reduces the overall financial risk and gives you the freedom to plan accordingly. There are various investment options such as shares, mutual funds, and more. Each type of investment offers you benefits that suit your financial goals. One such investment type that you can explore is a New Fund Offer or NFO. Let us read in detail about what is NFO, the types of NFO, how to invest in NFO, the benefits of investing in NFO, who should invest in NFO, and more.

What is NFO?

A New Fund Offer or NFO is offered by an Asset Management Company (AMC) to launch a new category of fund. AMC issues an NFO to raise capital to buy securities. AMC uses NFO for selling the initial funds shares to the investors.

Types of New Fund Offers (NFO) 

Below are the three types of NFOs available in the market.

·       Open-Ended New Fund Offer

The open-ended NFOs are managed by the AMC or its associates and are not traded on exchanges. It is issued to raise initial capital to purchase mutual fund units. There is no limit on the number of shares issued during the live period. This allows investors to make purchases and redemption freely.

·       Close-Ended New Fund Offer

In the close-ended NFOs, you can enter the market during the live NFO period. You cannot buy or redeem new units once the live period has expired.  During the NFO period, a limited number of shares are issued offering a specified number. Also, they are traded on the stock exchange with daily quotes.

·       Exchange-traded funds

Exchange-traded funds allow investors to buy and redeem without any restrictions. It is created to track the performance of a specific index such as NIFTY Bank, NIFTY 50, NIFTY Next 50, Sensex, etc.

Things to Keep in Mind Before Investing in NFO Fund 

Before investing in NFO funds, you must keep the following things in mind: 

• AMC reputation: AMC’s reputation and historical performance will help you understand whether to invest with the particular AMC. You must check the current position of AMC’s previous NFO before investing. You must also ensure the AMC is reputed and trustable. 
• Type of market instruments: You must obtain the portfolios from the AMC to check the type of stock market investment that the mutual funds scheme will invest in. 
• Overall cost: Before investing, you must check any exit loads on redemption of the mutual funds' schemes before its tenure. Alongside, you must consider the expense ratio of the fund.
• Financial condition: Financial planning is the first step before you invest. Check your investment goals that align with your financial requirements and choose the right investment instrument. This reduces any risk of financial burden. 

How does the NFO work? 

Similar to an IPO, an NFO is issued by the AMC and is open to investors for a specified period during which investors can apply for an NFO. NFO is a new fund – a mutual fund issued to the investors first for investment. To build an ideal portfolio based on the fund’s investment objective, the fund manager issues NFO accumulating adequate initial capital from the NFO applicants.

How to Invest in an NFO?

As an investor, you can invest in NFO through the methods mentioned below. You can choose the methods at your convenience. Let’s read in detail:

·       Through a broker

You can select a broker to invest in NFO. Before selecting a broker, you must check if the broker is authorized. Once you are sure about the broker, complete all the formalities under the guidance of your broker and invest. Investing through a broker helps you avail of broker services, making the entire experience hassle-free.

·       Through Online-trading account

You can use your online trading account to invest in NFOs.  NFO units can be purchased and sold online using your online trading account. Using the account, you can track the Net Asset Value (NAV) of your investment.

Benefits of Investing in an NFO

Before investing in an NFO, you must assess your financial goals and financial condition. This allows you to plan your investment better. Below are a few of the benefits of investing in an NFO:
 

• Flexibility: Investing in close-ended funds gives you the flexibility to invest your money in the market. The fund manager can hold a part of the funds to invest later if the market is bad for investment.
• New Strategies: It gives you a chance to invest in new and innovative strategies offered in close-ended funds.
• Stable Fund Flow: With close-ended NFO, funds are locked in for a particular tenure which allows the fund manager to focus on selecting and managing investments.
• Lock-in support: Investors generally have a habit of spending short periods of time in the market. With lock-in support, it creates a habit of investing for a long period which improves bad investing behavior.

Who should invest in NFO?

If you are willing to take risks associated with new schemes and want to invest long-term, NFO can be a suitable investment option. However, before investing you must always read all the related documents carefully and understand the terms and conditions.