When dipping your toes in the stock market, you might have come across the term NFO quite often. It is a commonly used term in the world of mutual fund investments.
NFOs are becoming a popular investment options as they allow you to invest in a fresh mutual fund scheme.
This post can help you make the most of your stock market investments, especially those related to NFOs. In this blog, we will explain the NFO meaning, types, benefits of investing, and more.
NFO Meaning – What is an NFO in the Share Market?
NFO stands for New Fund Offer. It refers to the first subscription offer of a new mutual fund scheme. In other terms, it is the initial offering of a mutual fund scheme.
During the New Fund Offering, the Asset Management Company (AMC) invites you to invest in the first few units of the new scheme with the objective of attracting investors and raising capital for the fund.
Further, it is a limited time offer similar to an IPO and comes with a fixed subscription period as well.
How Does NFO Work?
Learning about NFOs and how they work is as important as understanding IPOs. The reason behind this is simple: both products have the potential to generate desired returns.
During the NFO period, you can subscribe to the proposed scheme’s units, typically at face value, which can be as low as ₹10. Once the NFO is closed, the mutual fund scheme can be officially traded on the market. You can then sell or buy units of the fund on stock exchanges at the applicable Net Asset Value (NAV).
Simply put, an NFO in the share market lets you buy a new mutual fund scheme at a low price during the offer period. As the fund starts performing, you can sell it at a higher NAV. This helps you to enter a new fund at an early stage with low initial investment. Moreover, it gives you an opportunity for wealth creation when held for a longer term.
Types of NFO in Stock Market
- Open-ended NFOs: These are the mutual funds in which you can enter or exit at any time. open-ended funds offer high liquidity as you can invest or redeem them anytime. You can purchase these funds at the latest applicable NAV, even after an NFO is closed.
- Closed-ended NFOs: These are the mutual funds in which you can only invest during the NFO period. Unlike others, these funds are issued for a specific maturity period. You can not make any further investments after the NFO period. You can only redeem after the fund gets officially listed on the stock exchanges.
Benefits of Investing in NFO in Stock Market
- Fresh Investment: NFOs offer the chance to diversify your investment portfolio by participating in a newly introduced mutual fund on the stock market, all at an initial low investment cost.
- Minimum Capital Requirements: Investing in an NFO can be accessible due to its attractive initial unit pricing, often starting at just ₹10. However, it is important to note that fund houses also specify a minimum investment amount, which may vary and generally exceed the base unit price, to participate in these offerings.
- Low Expense Ratio: NFOs have a low expense ratio, which indicates that a minimum amount of the fund’s assets are used to cover various expenses.
- Helps in Portfolio Diversification: NFOs are often issued under various themes or asset classes. It gives you the chance to explore different sectors and industries and diversify your investment portfolio.
- Professional Management: Since NFOs are mutual funds, they are managed by expert fund managers. For example, Helios Flexi Cap by renowned money manager Samir Arora was launched on November 13, 2023, and had given a 15.56% return as of March 26, 2024.
- Long-term portfolio: Investing in NFOs suits long-term portfolios, similar to long-term investment stocks. This is because they offer early access to potential growth sectors and leverage compounding returns and market trends to accumulate wealth over time.
3 Things to Consider Before Investing in NFO in Share Market
- AMC’s Financial Performance: Before investing in an NFO, look at the financial performance and goodwill of the Asset Management Company issuing the NFO.. Make sure that the AMC is trusted and reputed. Moreover, you must learn about the fund manager’s experience and the past funds handled.
- NFO’s Objective: The reason behind the issuance of NFO in a stock market tells a lot about the risk and returns associated with it. So, before parking your money, consider learning about the reason behind this fundraising offer.
- Return Potential: Your main objective behind investment in NFO is to generate lucrative returns. Thus, estimate the return potential of the mutual fund by comparing it with similar funds of its kind.
How to Invest in NFO?
Investing in a New Fund Offer is similar to investing in other mutual funds. You can easily invest online by visiting the website of the fund house or AMC. Alternatively, you can also invest through trusted online investment platforms.
The process involves completing the KYC and applying for the desired units of NFO. Next, make the payment based on the number of units. Once the NFO purchase is successful, the fund house will credit the agreed fund units within 4-5 days.
How is NFO Different from an IPO?
| Aspect | IPO (Initial Public Offering) | NFO (New Fund Offer) |
| Launched By | Companies seeking to raise funds from the public | AMCs aiming to launch a new fund in the stock market |
| Purpose | To raise funds from the public for expansion, debt repayment, acquisitions and other needs | To introduce a new fund scheme to investors |
| Allotment process | Through a bidding process with reserved quotas for investors | Open and equal opportunity for all investors |
| Investor Quotas | Yes, includes reserved quotas for Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs), retail investors, etc. | No specific quotas, open to all types of investors equally |
Summary
A New Fund Offer, or simply NFO, is the inception of a new mutual fund in the share market. By allowing you to invest in its initial phases at low prices, it provides you with the opportunity to grow your returns with the growth of the fund.
Investing in NFO doesn’t guarantee high returns or profits. Like any other investment option, its success depends on various factors, such as objectives, market conditions, and investment strategies. So, before making any investment in NFO, perform a thorough research and market analysis. It is also recommended to seek advice from a reliable share market advisory.
FAQs on NFO (New Fund Offer)
What is the NFO period?
The NFO period is the timeframe within which you can purchase the units of the mutual fund scheme during its initial offering.
Are Equity-based NFOs taxable?
Yes, NFOs are taxable like other equity mutual funds; that is, long-term and short-term capital gains tax is applicable.
Who should invest in an NFO?
NFO can be suitable for individuals with a long-term investment horizon and a high-risk appetite. It is crucial to read all the scheme-related documents before investing.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.