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NFO Meaning in Mutual Fund – Know more to Invest on New Fund Offerings

Planning to invest in new fund offerings in 2022? Check out this article to know more about NFO meaning, its types, how to invest in them, returns, benefits & much more!

If you have ever thought of investing in mutual funds, you must have heard about NFO or New fund offer. But what is it, how do they work, their benefits? Let's dive in and take a broader understanding of NFO, its meaning and help you make an informed decision of whether it's any good as an investment option.

What is NFO?

A new fund offer is an introductory offer for a new mutual fund scheme for the investors. Each mutual fund scheme comes into existence through NFOs. Whenever a company launches a new mutual fund scheme, a new fund offer (NFO) occurs for the investors, allowing the company to raise funds to purchase new securities.

The NFO is made open for a limited period, in which the investors can invest in the scheme at the offer price. The offer price of a mutual fund scheme is often fixed, which is Rs. 10 per unit. Once the NFO period expires, the investors can only purchase at the specified price (NAV), which is usually higher than the price offered in the NFO.

 Types of NFOs

There are two types of NFOs investors can opt for based on their needs and goals.

  • Open-Ended funds - The open-ended fund appears post-NFO. When NFO ends, the fund is declared open-ended funds. It is one of the most common mutual funds as it allows the investors to enter and exit the fund as per their wish. Investors can purchase as many units based on the NAV. The NAV price is usually higher in comparison to NFO, as investors pay the current market NAV for purchasing each fund unit. An open-ended fund is an ongoing mutual fund NFO, usually managed actively by the AMC.
  • Close Ended Funds - A closed-ended fund comes with a limited number of units to be purchased by the investors during the specified NFO period. The closed-ended funds are passively managed. These funds are traded just like stocks but come with a maturity period. As the name implies, a closed-ended fund closes only after maturity. Once the NFO ends, investors cannot buy and redeem the units until maturity. The maturity period for the fund is usually 3-4 years. 

In the end, both options are good to invest in and are likely to generate capital gains and dividend returns based on the scheme.

Why is NFO a good opportunity for investors?

Since the NFO is for new funds, its price is less than that of existing funds. NFO is usually available at Rs 10, lower than its Net Asset Value. This difference between NFO at face value and fund at NAV can sometimes prove a rewarding opportunity for investors. This difference between NFO at face value and fund at NAV can sometimes prove a rewarding opportunity for investors. With that said, the investors should select an NFO only when the scheme offers them an unusual investment opportunity matching their financial goals and risk appetite.

How to invest in an NFO?

Inventors can invest in the NFO in 2 ways depending upon their preference: Online and Offline.

Online mode (Invest through your online trading account or Demat account)

  • Log in or register to your online trading account or Demat account.
  • Look for the various NFOs available. Check the details of the ones you find suitable, like the fund theme, operating fund house, asset allocation, etc.
  • Select the one you find the best based on your goals.
  • Fill in the investment amount and select the option whether you prefer Lump sum payment or SIP.

Offline mode (Invest through a broker)

  • Research and find an authorized broker to help you invest in NFO.
  • The broker will share the details about the NFOs and help you select a New Fund Offer in line with your goals.
  • You will be required to fill an application form and complete some formalities.
  • Once done, get in touch with your broker to know the status of your fund’s performance.

5 Things to consider before you invest in NFO funds

  1. Carefully read the Scheme Information Document (SID) and try to understand the investment objective of the mutual fund scheme.
  2. Check the background and previous performances of the fund house and the fund manager before investing in the NFO. A fund house with strong performance is likely to manage the new scheme more competently.
  3. Select the NFO only after considering the costs associated with the fund scheme. The newer funds are managed in small units but can levy higher expense ratios. Make sure to invest in a mutual fund scheme having a lower expense ratio to increase your returns.
  4. Make sure to check the investment theme of the NFO before you invest. Select the NFO you think has the potential to deliver the return as per your risk profile and investment appetite and yet offers you a unique proposition for the long run.
  5. Make sure your risk appetite aligns with the fund’s risk profile. You should not invest in high-risk profiles unless you hold a strong risk tolerance. 

Benefits of investing in an NFO

  • Since there is a considerable difference between the face value of NFO and the NAV, it sometimes turns out as a pleasant opportunity for the investors to invest in the NFO schemes.
  • With ETF NFO, you get the opportunity to invest in funds before anyone else.
  • The NFOs are launched with various themes and strategies to help you diversify your portfolio across asset classes, sectors, and market caps.
  • The lock-in period in closed-ended funds ensures that the investors stick to the funds for a long time and saves them from backing out untimely and ruining their financial goals.

Conclusion

While NFO can be highly rewarding for investors, it’s essential to do thorough research about the NFO and understand the benefits you can reap from it. Consulting a financial advisor is a great help to get comprehensive knowledge about NFO mutual funds and select the scheme based on your profile while complying with the associated terms and conditions for investing.

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FAQs 

Got more queries related to investing in the NFO? See if we got you covered in this FAQ section.

  • What is the difference between NFO and IPO?
    • With NFO, the company offers its fund units to investors. In an IPO, a private company sells the shares of a company to the public. NFO and IPO are similar as both attempt to raise capital for further operations. However, they differ in one of the ways that IPO represents stock, whereas NFO units of mutual funds.
  • For how long an NFO remains open for the investors?
    • The maximum duration for the NFO to remain open in the market is 30 days.
  • Can I do SIP in an NFO?
    • You can opt for a SIP if the NFO is an open-ended fund.
  • What is the minimum subscription amount of an NFO?
    • The minimum subscription amount of an NFO can be as low as Rs 500 to Rs 5,000.
  • Is NFO taxable?
    • Yes, NFOs are taxed just like mutual funds. Equity funds with 65% equity allocation are taxed 15% for short-term gains. Long-term gains have an exemption on up to 1 lac gains and then 10% tax on consequent gains. Short-term and long-term are fixed based on a holding period of 12 months. 
    • Other NFOs are taxed similarly to debt mutual funds. Here, Short-term and long-term are fixed based on a holding period of 36 months. Short-term capital gains are taxed based on investors’ slab rates, whereas long-term capital gains are taxable at 20% with the benefit of indexation.

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