New fund Offer (NFO)
The first-time subscription offer for a mutual fund scheme is called a new fund offer (NFO). An offer of a new fund is launched in the market to raise capital from the general public so that they can purchase government bonds etc. from the market. The AMC and Fund houses launch NFOs based on a theme or simply to complete their product basket.
NFOs are open for investment for a Maximum of 30 days. The tenure and period are defined by AMC. NFO can be bought at an offer price of Rs. 10 per unit. Once the NFO is over, the fund will reopen for subscription again and investors will have the opportunity to subscribe at the prevailing net asset value (NAV).
Types of New Fund Offer (NFO)
To invest in NFO, investors must know about the two types of NFOs: Open ended NFO and Close ended NFO funds.
- Open-ended NFO Funds: The open-ended NFO funds begin when the NFO term ends. Under this fund, investors can subscribe to the NFO before the NAV is declared of those units. Such investments in the long term yield better return. In the open ended NFO schemes investors can enter and exit from the fund at any time after the launch.
- Close-ended NFO Funds: Closed ended NFO funds do not allow the entry of a new investor after the fund is closed for the subscription. Even the existing investors can only exit after the specified subscription period. The close ended NFO funds generally fixed the tenure of for 3-4 years. Some closed ended funds become open ended after the lock-in period. Sometimes the proceeds of close ended funds are transferred to the open ended funds by AMCs after the maturity of the close ended funds.
Liquidity in NFO
Open ended schemes require redemption and switch out to be completed within five business days of the date of allocation.
In the event that an investor redeems an NFO before maturity, they can be charged exit fees/exit loads. An investment in a closed-ended product can not be redeemed before its maturity.
How to Invest in NFO? The process to invest in NFO
Investing in NFO is a straightforward and quick process for investors.
- First, complete the KYC process
- Log in to investmentz.com and check the suitable NFO based on your investment interest/ goals.
There are certain points to remember while investing in NFO.
- Check the history of the AMC/ fund house you are investing in. The fund house needs to have a potential mutual fund investment history
- Before you decide to invest in NFO, consider the factors such as risk involvement, asset allocation, expected returns, etc.
- Consider the track record of the newly launched NFO funds.
- Always read the offer document and understand the complete investment process that the fund manager will follow for the NFO investment.
- Analyze the invested fund in NFO to track the fund's performance.
- The minimum NFO subscription amount is important. It may range between ₹500-₹5000. This minimum subscription amount range will help you to decide in which NFO mutual fund you should invest in.
- Always check the lock-in period for the NFO investment you will be making in the AMC. It should match your investment goals and planning.
FAQs on New Fund Offer
Through the new fund offer, the asset management company/ fund house raises the capital from the public/ investors to purchase securities, bonds, equity shares in the market. NFO is comparatively cheaper than the existing funds because it is a new financial product in the market.
An Initial Public Offering is the first offer made by the company to the retail investors to subscribe to their company shares. NFO is the first offer of mutual fund units to the retail investors that is newly launched by the asset Management Company/ Fund Company.
No. But you can start SIP investment in NFO once the mutual fund units are allotted to you. Post allocation the scheme remains open for purchase and redemption
Allotment of Units generally occurs within five (five) business days from the closure date of the New Fund Offer. Within two working days after receiving a request from a unit holder, the AMC issues units in the dematerialized form.
Investing in the NFO is free of charge since all expenses are borne by the asset management company. Depending on the size of assets acquired during the NFO, an expense ratio of up to 2.25% of the assets can be charged by the AMC.