An NFO, or New Fund Offer, is an opening offer by an asset management firm for a scheme. It allows investors to subscribe to the mutual fund scheme during a limited period. The NFO operates like an Initial Public Offering (IPO) in the primary markets, as both aim to raise capital from investors for various activities and projects.
During an NFO, a mutual fund scheme is made available for investment to accumulate an adequate amount of initial corpus. This corpus is used by the fund manager to build a portfolio based on the investment objectives of the scheme. The fund house launching the NFO needs to comply with SEBI regulations, including the minimum subscription amount and the 20-25 rule, among others. The NFO period typically lasts for 15 days in India. After the NFO period ends, the mutual fund company allots the units of the new scheme within five days.
The most common type of New Fund Offerings is for open-end and closed-end mutual funds:
The benefits of NFO include:
NFOs are not inherently riskier than existing mutual fund schemes. The risk associated with an NFO depends on the investment objective, asset allocation, and the underlying securities of the scheme. It is essential to carefully analyze the scheme's investment strategy and risk factors before investing.
The minimum investment amount for an NFO varies depending on the mutual fund scheme and regulatory requirements. Fund houses are required to comply with the Securities and Exchange Board of India (SEBI) guidelines, which may specify a minimum subscription amount for different types of schemes.
An NFO is a safer, less talked about alternative to an IPO. Of course, one could argue that NFOs are less talked about because they are less frequent than IPOs. But in this case, infrequency has no impact on the desirability of the offer. For starters, NFOs are cheap. You can buy a unit during an NFO for ₹10.
Furthermore, historical data suggests that NFOs do have the ability to generate profits after the NFO period, in that, the NAV may rise to a price more than ₹10.
Before investing in an NFO, consider the fund house's returns, long-term performance, volatility, and risk management. Analyse the investment objective, potential themes, securities, and type to understand the risks involved, liquidity and lock-in period. Additionally, scrutinize the type of NFO on offer and where it plans to invest its capital.
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