All You Need to Know about Mutual Funds NFO

When an Asset Management Company (AMC) launches a new mutual funds scheme into the market, a first-time subscription offer is made to the public for that scheme in the form of an NFO or New Fund Offer. This is done to raise capital from the public to buy securities such as shares, government bonds, and others. NFOs are quite similar to the Initial Public Offer or IPOs of the shares market. 

How do NFOs work?

A New Fund Offer is made for a limited time period only during which investors can invest in the fund. Under NFO, the funds are available for purchase at their NAV (Net Asset Value), that is, Rs. 10. Once the NFO closes, both existing and new investors can purchase the fund units at a fixed price, which is usually higher than the NFO value. 

Note – SIP investments in NFOs can only be made after the NFO expires and the fund is available for further purchase. 

Types of NFOs 

New Fund Offers are generally of two types, namely – 

• Open-ended NFOs 

If the NFO made is open-ended, it is only officially launched once the NFO period has expired. Meaning, you can enter and exit the fund anytime you want after the initial launch of the scheme. The key feature of an open-ended NFO is its liquidity. 

• Close-ended NFOs 

In a close-ended NFO, the units you purchase during the NFO period cannot be redeemed immediately after the NFO period expires, should you wish to do so. These funds normally have a maturity period of three to five years, and up until then, your investments are locked in. Though these mutual funds can be traded before maturity in the stock exchange market, their liquidity is still very low. 

Why do investors invest in NFOs?

The primary reason investors invest in NFOs is profit generation – the price difference between NAV and post-NFO can help them gain good returns on their investments. Plus, many NFOs are invested in innovative schemes such as business cycle-based investments, ESG investments, and more, and an investor can get early access to them. 

Moreover, there are benefits even to close-ended NFOs as they allow investors to stay invested in the market long enough to understand how it functions and what it takes to gain healthy returns. Through disciplined investing, investors can avoid hasty decisions that could impair their gains significantly. 

Things to consider before investing in NFOs 

• The fund objective of the nature of securities, which lets you build a perception of the risk involved, the asset allocation, the returns, among other things

• The history and reputation of the AMC launching the NFO, which will help you predict fund performance 
• The total cost of investment and the expense ratio as they help in deciding the potential returns and how profitable the investment is 

How to invest in NFOs

There are several ways to invest in an NFO – you can reach out to a broker or use an existing online trading account. However, there’s an easier and quicker way to invest in NFOs – via smartphone apps such as the Moneyfy app. 

All your investment needs can be met under a single roof – complete a simple KYC process, compare between funds, build your portfolio, and invest in mutual funds online!