A short note on New Fund Offer (NFO)
So, what is an NFO?
A new fund offer (NFO) is a mutual fund scheme made available for investment for the first time by a mutual fund house or Asset Management Company (AMCs). The aim of launching an NFO is to raise capital from the public to purchase securities (stocks or debt instruments) and pay for administrative tasks.
In other words, an NFO is a first-time opening of subscription offer of a mutual fund scheme. An NFO usually lasts for 10 days and up to 15 days for all schemes except ELSS and allows investors to buy units of the scheme at face value which can be Rs. 10 per unit or Rs. 100 per unit or Rs. 100 per unit.
Types of NFOs
After having attained a grasp of NFOs, let’s take a closer look at their structural classification. Among the three types of NFO mutual funds – open-ended, close-ended, and interval plans – which one should you go in for? Let’s help you decide.
Open-ended NFOs
Open-ended funds are for investors who want to invest or redeem units at any point of time as there is no fixed maturity date. This means investors can buy or sell units at the scheme's prevailing net asset value (NAV) and get liquidity at any point in time. They can invest in these schemes either through SIP or lumpsum modes. In short, open-ended NFOs are ideal for investors seeking flexibility as they can enter or exit the scheme anytime.
Close-ended NFOs
Close-ended NFOs are launched for a fixed tenure only. Here, investors can buy or sell units only during the initial offer period. These funds are for those investors who want to invest for a specific period. For redemption, funds must be listed on stock exchange first else investors will get the money at the scheme maturity. Also, close-ended NFOs do not permit SIP investments. Additionally, closed-ended funds come with a fixed tenure of around 5-7 years from the investment date.
Interval plans
Interval plans are a mix of open-ended and close-ended schemes. These NFOs allow investors to transact within a specified timeframe, usually annually or semi-annually. Thus, with interval plans, investors can purchase and redeem scheme units when the AMC allows. This is by way of having a Specified Transaction Period where the investors can either invest in the scheme or redeem from the scheme.
Benefits of investing in an NFO
Just like other ongoing schemes, the chief advantages of investing in an NFO are low initial investment and a chance to leverage future performance. Here are some more benefits:
Accessible: NFO units are offered at a face value and the units are allocated accordingly. These are accessible to investors who want to start off with a low initial investment. For example, if you are investing Rs. 10,000, you will be allocated 1,000 units in the NFO scheme with a face value of Rs. 10 each.
Flexibility: NFOs are handled by expert fund managers who make all fund related decisions. Thus, investors can be secure in the knowledge that their money is being handled in the best way possible.Open-ended NFOs
Diversification: NFOs can also help investors diversify their portfolio by including newer strategies. This way, you can potentially tap into a new avenue of returns, especially if your current investments are not performing.
Future growth: With effective management, NFOs can help you meet your financial goals by giving you a chance to capitalise from the fund’s potential growth over time. You can also invest in a specific sector if it has potential for future growth as and when an AMC launches that NFO.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.