A New Fund Offer (NFO) is the first time an asset management company offers a scheme. When a fund is launched, a New fund offer is made. This helps the firm raise money to buy securities. An investor can only sign up for an NFO during a certain time period. Because of this, NFOs work on a “first come, first served” basis.
At an offer price, investors can buy an NFO unit of the mutual fund scheme. Most of the time, this price is set at Rs. 10 per unit. When the limited time period is over, the units of the fund can be bought at the offer that is available at that time. Most people think of a New Fund Offer (NFO) as being like an Initial Public Offering (IPO). But an NFO and an IPO are not the same in a few ways, which are explained below.
Types of New Fund Offers (NFOs):-
There are two kinds of new fund offers:
- Open-ended funds:- This fund is officially started when the NFO ends. After the fund starts, investors can join or leave at any time.
- Closed-end funds:– Investors can’t get in or out of a closed-end fund after the NFO period and before the fund’s maturity. Most of the time, this time period is between 3 and 4 years after the launch date. In theory, investors can buy and sell units of such a fund on the stock market, but such funds tend to have low liquidity on the market.
Why Invest in an NFO?
The following are the benefits of investing in a new fund offer:-
- New Strategies:- Close-ended funds offer the chance to invest in new and innovative strategies that existing open-ended funds may not. The February 2018 Edelweiss Maiden Opportunities Fund invested in pre-IPO and freshly listed firms. Put option hedging strategies were introduced in the DSP A.C.E Fund Series 2 and Kotak India Growth Fund Series 4. These closed-ended funds were only available during NFO.
- Flexibility:- Close-ended funds can choose when to invest. Thus, even if the fund is launched at a market peak, the fund manager can keep your funds and invest some of them later. Flexible fund managers outperform.
- Freedom from large flows:-Large amounts of money can come in or go out of open-ended funds. A sudden drop in money coming into the fund can force the manager to sell his stocks at rock-bottom prices, which is bad for everyone who owns units in the fund. On the other hand, investors in closed-end funds can’t leave until the fund is over, so the manager can focus on picking stocks and keeping an eye on them. An NFO is the only way to put money into a closed-end fund.
- Lock-in Support:– Time in the market beats market timing for better returns. Most equity fund investors invest for two years, which reduces their returns. Because investors can’t avoid market panics and manias. Close-ended funds’ 3-to-4-year lock-in prevents investors from unhealthy investing habits.
Guide to Investing in NFOs:-
Putting money into a New Fund Offer is easy. Your KYC is the first step that needs to be done. Once you’ve done this, you can sign in to your Paisabazaar account and look for plans that match your investment goals.
Investors think that the New Fund is a good deal for their money, so they sign up for it. NFOs help investment firms reach their goal of increasing the amount of money they manage. You should think about the following things before putting money into a New Fund Offer:
- Check out the fund house’s history. You should make sure that the fund house you choose has a long history of investing in mutual funds.
- Before putting your money into an NFO, it’s important to think about things like how you’ll divide up your assets, how much risk you’ll be taking, how much money you expect to make, etc.
- NFOs are put out by new funds that haven’t been around long enough to have a track record, which may add to the uncertainty.
- Examine the offer document and the fund manager’s investment process. Staying informed about the fund manager’s plans for your money is crucial.
- Tracking NFO performance is impossible because they have no performance history. You must consider returns when investing. Analyze your fund with an ideal return figure.
- Choosing an NFO fund depends on its minimum subscription amount. The minimum subscription cost is usually 500–5000 rupees.
- Some NFOs have 3-5-year lock-ins. Invest according to how long you want to lock in your funds.
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