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Find out about what is NFO in mutual funds and its types
Occasionally, companies need to raise money to pay for different types of costs. Whether they wish to expand the business, pay their employees, or manage administrative costs, they need sufficient cash flow to keep their businesses afloat. One of the ways in which they can raise money is through an NFO. Let us find out what is NFO in mutual funds in this article.
NFO stands for New Fund Offer and is the initial sale of fund shares that an investment company issues to raise capital for purchasing securities. It is similar to stock market Initial Public Offering (IPO), through which a company raises capital from the public to fund its expenses in exchange for share units. Unlike IPO, which is tied to shares, NFO is tied to mutual funds. However, NFOs are marketed much less aggressively than IPOs. The Asset Management Companies (AMC) typically target only a select group of investors, making the NFO much less noticeable to investors than IPOs.
AMCs offer NFOs for a specific period, during which investors can buy mutual fund units at a specified offer price. Usually, the AMCs set the offer price as low as INR 10 per unit. Once the NFO closes, investors can buy those mutual funds at the existing Net Asset Value (NAV). The low offer price makes NFO a good investment opportunity.
To file a New Fund Offer, the AMC approaches the Securities and Exchange Board of India (SEBI). It submits a Scheme Information Draft comprising all the scheme details, i.e., risk factors, investment strategies, fundamental attributes, fees, expenses, etc. The SEBI monitors the financial health of the AMC before issuing the NFO.
Having explained NFO meaning, let us look at its two types.
An open-ended fund is available to purchase continuously. These are liquid funds that do not have a fixed maturity period. You can buy and sell an open-ended mutual fund at the daily declared NAV even after its NFO closing date. Furthermore, you can opt for a Systematic Investment Plan (SIP), Systematic Transfer Plan (STP), or Systematic Withdrawal Plan (SWP) when investing in open-ended funds. These funds are ideal for aggressive investors with higher risk appetites looking for higher returns.
Close-ended funds are mutual funds that have a fixed maturity period. Hence, you can invest in these funds only during the NFO period. After the closing period, investors are unable to buy or sell close-ended funds. These funds get traded like stocks, and you can redeem them after maturity. Fund managers can efficiently strategise ways the investments to achieve maximum gains. Closed-ended funds require lump sum money to invest. If you can invest a lump sum for longer investment horizons, you should consider close-ended funds.
Now that you know what is NFO, you can choose this investment vehicle. Ensure you check the company background, fund managers' past performance, your risk appetite, and your preferred investment duration before investing. A good NFO should also help you fulfil your investment goals.
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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.
