NFO or new fund offer refers to a new mutual fund scheme for the public in the financial markets with an aim of first-time subscription. In other words, a new mutual fund scheme based on a new investment strategy is offered to investors for a limited period of time. Asset management companies (AMCs) offer NFOs as new mutual fund products which are not previously present as part of the product basket. NFOs are offered for both close-ended and open-ended mutual fund schemes. In case of the former, investors cannot invest once the NFO period gets over and are required to stay invested until the maturity period is over; whereas the latter can allow individuals to invest in the units of the scheme when it reopens for subscription. Investing in an NFO depends on factors like the risk investor is willing to take, and the value proposition offered.
Following could be seen as the characteristics of mutual fund NFOs:
NFOs offered by close-ended mutual fund schemes allow investors to invest in new investment strategies that may not be explored by existing mutual fund schemes.
A close-ended mutual fund scheme may launch an NFO when the markets could be at a peak. This might allow investors the flexibility to choose when to invest their funds in the financial markets.
You will be able to purchase the units of the scheme at the new fund offer price which basically is the price per unit that the investor has to pay to invest during the NFO.
NFOs are offered by close-ended funds schemes for a limited period of time, after which investors cannot purchase new units until the scheme reaches its maturity. This might further allow fund managers to select and track the assets (securities or bonds) in a more streamlined manner.
Once the NFO window of open-ended mutual fund schemes closes, any purchase of units can be made at the NAV (net asset value) of that particular scheme. Here new fund offering can help investors purchase units at comparatively nominal cost before the NAV of the fund is determined.
Investments in close-ended funds can only be made through NFOs. The nature of some close-ended funds when it comes to the holding period until maturity can help investors avoid giving in to panic sentiments and might help them receive returns commensurate to the risk involved by the time the scheme matures.
The timing of launch of NFOs is of importance as it may yield varying results depending on the entry point of an investor. The investment objective of the NFO may not always suit one’s investment profile.
It might help investors to understand all the details regarding the NFO of a particular fund by thoroughly studying the scheme information documents (SID). This may further aid investors in making appropriate investment decisions. One can consider investing in NFOs if they believe they are offered something more than the other existing funds and can help fill in the gaps of their investment portfolio.
Source: ET Spotlight