ALL YOU NEED TO KNOW ABOUT NEW FUND OFFER
A new fund offer (NFO) is the first time subscription offer for a new scheme launched by the asset management companies (AMCs). A new fund offer is launched in the market to raise capital from the public to buy securities like shares, govt. bonds etc. from the market.
How does the New Fund Offer work?
In a new fund offer, the opportunity to subscribe to the scheme is available only for a limited period. The investors may purchase units of the mutual fund scheme during the pre-defined period and subscribe to the NFO at an offer price. This is usually fixed at Rs 10. Once the tenure expires, the investors would be able to purchase the fund units at the specified price. NFO subscribers, in general, have been able to generate noticeably better gains post-listing.
Difference between IPO and NFO
A lot of times, NFO is confused with IPO since both are ways for companies to raise money. However, they do differ. IPOs help businesses to raise capital to improve their operations, while NFOs help AMCs raise money from investors to buy more company stocks, debt, gold etc.
Also, IPOs are generally priced much higher than the face value. But in the case of NFOs, the fund is generally available at Rs 10 per unit.
Types of New Fund Offer
After the NFO, an open-ended scheme is available for all the investors. The investors, including the NFO subscribers, can then redeem their purchased units anytime they like.
In close-ended schemes, NFO investors are not able to exit the fund even after the NFO period. These funds generally have a maturity period of 3-5 years, and investors can only exit after maturity. In theory, these funds can also be traded on stock exchanges even before maturity. But their liquidity on exchanges is generally very low.
BENEFITS OF INVESTING IN NFO
Generate Profits -As discussed above, there can be a significant difference between the NFO price and the NAV. This difference can sometimes be highly rewarding.
Invest in Innovative Funds – Many AMCs are now launching innovative mutual funds schemes. For instance, some schemes specifically invest in recently-listed stocks and IPOs. And some schemes use hedging strategies to generate better returns for the investors. With NFO, you get to invest in such funds before it is open to every investor.
Lock-in Period for Disciplined Investing – A lot of people invest in mutual fund schemes only to redeem it after a few months. This negatively impacts the investment goals. But with NFOs, like close-ended NFO, there is a lock-in period for which you must to remain invested. This makes investment more disciplined and also increases the returns potential.