The term NFO is often used in the mutual fund industry. NFO is an abbreviation for New Fund Offer. Over a short period of time, investors purchase NFO as an initial subscription, when it is launched by asset management firms (AMCs). Today, we will go in-depth about the intricacies of the NFO funds and its significance in the mutual funds industry.
What is an NFO?
To understand NFO, you must have the knowledge about initial public offerings. Because, similar to IPOs, before establishing a new mutual fund scheme in the market to raise cash, Asset Management Companies (AMCs) contain specifics about the portfolio, such as the firm shares to be purchased, the type of assets to be procured, the fund manager, etc. in NFOs. Investors buy shares of this mutual fund at the subscription fee, which is typically set at Rs. 10 per share.
The fund house raises funds from the public through an NFO to purchase market instruments such as equity shares, bonds, etc. The primary purpose of such funds is to raise cash and attract investors, but after the tenure expires, the investors will be able to purchase the fund units at the set price. They resemble initial public offerings (IPOs), in which shares are sold to the general public before being listed on a stock exchange. Asset management businesses (AMCs) strive to capitalize on this investor mindset. This is why individuals choose to pursue the supposedly less priced NFOs that draw more money.
The types of New fund offer are open-ended and close-ended. In open-ended fund, It permits individuals to purchase units of a mutual fund before its NAV has been calculated, allowing them to profit in the long run. When a mutual fund begins operations, investors must pay the relevant net asset value for each unit of the fund.
Closed-ended fund offerings are typically among the most heavily covered new fund issuances due to the fact that they only issue a modest number of shares throughout their new fund offer. On an exchange, closed-end funds are traded all day long with daily price quotes. A brokerage firm will let investors purchase closed-end funds on the day of introduction.
What are the advantages & disadvantages of NFO?
Advantages:-
- Even if your timing is off and the NFO is released at a market peak, closed-ended funds allow you to invest at any time. The fund’s administration may be able to hold some of your money for future investments.
- NFO, as each unit of the recently introduced mutual fund scheme may be purchased from them for the face value of Rs.10. This is so that investors can become excited about NFOs, which are made available to the public at a discounted price when they first launch.
- Despite the possibility of earning significant benefits by investing in an NFO, investors should exercise caution when putting their money into a fund with no track record of performance.
- Investors in closed-ended funds are committed for the duration of the fund, as opposed to open-ended funds, which frees the fund manager to focus on meticulous portfolio management and tracking.
Disadvantages:-
- There is no certainty that an NFO would result in a successful mutual fund, therefore NAV has no direct impact on your mutual fund investment. There are no records to substantiate its performance.
- The majority of NFOs have a lock-in period since remaining in the market is more important than departing soon. Many investors lose money within the first two years of the market. Closed-ended funds’ 3- to 4-year lock-in periods, on the other hand, guard investors against dangerous investment practices by limiting early redemption of their units to six months to a year.
- Another problem is that when you redeem investment units in mutual funds that you bought during the NFO, AMCs charge exit loads if the NFO is not the continuation of a series of mutual funds. The exit cost, if you choose to redeem your investment, could be as much as 3% of your net asset value.
Before Investing in NFO Funds, Consider the following:-
- If the fund business has a lengthy history of operation in the mutual fund industry, say for at least five to ten years, you may evaluate the performance it has delivered during market ups and downs. If the fund has a solid track record, the NFO’s dependability may rise.
- It is recommended that the investor study prior returns because the offer document may or may not disclose this information. If you have already invested in the fund, you should consider reevaluating it every three years for the first three years. To better understand the return trend, compare the mutual fund’s performance to that of the index and peer funds.
- Although there is no entry load, certain NFOs include exit loads if you redeem units before the tenure has expired. This is another deciding factor. Exit loads may affect your gains if the lock-in time exceeds your investment horizon.
Mutual funds are a sort of investment that allows potential investors to earn over time. However, this is not always practical or desirable when investing in stocks; for example, there is a larger possibility of profit if you buy early in a company’s development cycle. This is especially true for Mutual Funds, which have been around for a longer time and have been subjected to more regulatory scrutiny. As a result, it is always preferable to put money in plans with an established track record rather than anything new or hazardous.
