What is New Fund Offer (NFO): definition, types, launches, and benefits

While looking at possible investment options on her investment application, Ritika came across the term NFO and started wondering about what the NFO meaning included. NFO or a new fund offering refers to the first subscription offering for any new fund incepted by an investment company. In mutual funds, an NFO is a new fund offered by an asset management company, and the option that Ritika saw on her app referred to the new funds which were being offered by various AMCs.

What Is a New Fund Offer (NFO)?

Investment companies and mutual funds come up with NFOs when they launch a new fund with the aim of raising fresh capital for purchasing securities or when they wish to capitalise on a potential opportunity. For instance, when the interest rate regime turned upwards earlier in 2022, many fund houses began launching NFOs for target maturity funds capable of locking in the relatively higher rates. In an NFO, the initial purchasing offer varies in line with the structuring of the fund, the details of which are clearly mentioned in the NFO document. An NFO could be launched for any and all varieties of schemes, from equity funds and debt funds to passive equity funds, passive debt funds and hybrid funds, enabling investors like Ritika to pick from a horde of options.

Understanding New Fund Offers (NFOs)

In simple terms, an NFO can be considered similar to an initial public offering by a company. While the IPO offers investors the opportunity to invest in shares, at the pre-listing stage, an NFO enables investors to purchase units of a new fund, before it is traded publicly. Frequently, fund houses undertake robust marketing activities to boost the uptick for their NFOs, in an attempt to raise as much capital as possible. Many investors prefer to invest in NFOs since they foresee the potential to make significant gains when the funds become publicly traded, akin to an IPO.

Types of New Fund Offers

Based on the scheme’s structure, an NFO can be either open or close-ended. Open-ended funds do not limit the number of units available for subscription and investors can buy or sell units either during the NFO or at any time thereafter. Units of open-ended funds are not traded on exchanges and such schemes report their net asset values every day, at the end of market hours. Such NFOs may be launched for both new strategies and pre-existing ones, based on the AMC’s prerogative.

While open-ended fund NFOs are not exclusive, close-ended NFOs are highly in demand since they only issue a certain number of units during the NFO period. Such funds trade on exchanges and the price of their units vary with the quotes.

Advantages and disadvantages of an NFO

As with every investment, there are some pros and cons to consider, when it comes to investing in an NFO. Advantages include the ability to earn a quick profit, if the close-ended fund trades at a price higher than its NFO value, after listing on the exchanges. Further, with close-ended funds, investors have the opportunity to access emerging sectors of the economy, while also diversifying their portfolios.

The major disadvantage of investing in an NFO is that a new scheme has no track record of success. Therefore, you cannot discern how well or poorly it will perform. Further, if it is aligned with an emerging opportunity, there is no forecasting exactly how the same will pan out, in the long run. Many NFOs also have a larger expense ratio than other funds, making it a costly option.

Is it good to invest in an NFO?

Whether or not to invest in an NFO depends on your investor profile and willingness to take on risk. If you are confident of the potential inherent in the fund on offer, then it would be a good decision to invest in an NFO.

How do I choose an NFO?

As Ritika noticed the NFO section in her app, you can also access the details of NFOs on your investment app. Alternatively, you can check AMC websites or brokerage sites for details of NFOs and pick an option which is most aligned with your risk profile, return requirement, time horizon and investment goals. Aspects such as a lower expense ratio, and the performance depicted by the other funds offered by the AMC and the fund manager, should be considered before choosing to invest in an NFO.

NFOs are an interesting option for investors, as long as you are certain of your choice and willing to take on additional risk, so decide accordingly.

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