A mutual fund is a popular investment option and often the primary choice for many, given the ease of investing. But even then, many fail to understand how it works. Initial public offering refers to the process of a company offering shares to the public for the first time. But how does a mutual fund distributes its units? The process is called new fund offering or NFO. Let us learn more about NFO and its importance through this article.
What is NFO?
When a fund manager introduces a new mutual fund to the market, investors may invest in the fund via the manager’s announcement of a new fund offer (NFO). Details of the portfolio, such as the company shares to be bought, the kind of assets to be acquired, the fund management, etc., are included in such new fund offerings as an initial public offering (IPO).
For these promotions, investors may acquire mutual fund units for the subscription fee of Rs.10 per unit. New fund offers are used to introduce both open-end and closed-end mutual funds to investors for a specific length of time, following which the funds are traded on the market based on their net asset value (NAV).
There is a 30-day cooling-off period for new fund offerings under SEBI rules. Mutual funds with an Rs. 10 subscription fee may use their earnings to buy shares in a wide range of firms that are traded on a stock market.
Any mutual fund deal executed after closing a new fund offering must be based on the fund’s NAV. By subscribing to new fund offerings, investors might have access to units in a mutual fund at a low cost. Hence, the profits realized subsequently are huge, enabling investors to realize enormous cash gains once the mutual fund begins trading on the open market.
Types of NFOs
There are two primary types of NFOs, open-ended funds, and closed-end funds.
If the NFO is for a new mutual fund scheme, and if the fund is open-ended, investors may buy and sell units whenever they choose. Whenever the NFO is available for subscription, investors may buy units in the open-ended new fund plan at Rs 10 each. Units of the open-ended fund may be purchased at the Net Asset Value (NAV) on the market at any time after the NFO.
During the NFO period, AMCs only provide a limited amount of available units of closed-ended funds. In contrast to open-ended funds, investors cannot buy units of the new close-ended fund created under the NFO once the offer has expired. The investment in the closed-end fund has a predetermined expiration date, after which it must be liquidated.
After the NFO offer period has expired, investors may still acquire and sell units of the close-ended fund by contacting the AMC and asking them to list the units on a stock market like the NSE or BSE. In a closed-end fund traded on the stock market, the net asset value (NAV) fluctuates due to supply and demand for the fund’s units. In addition, the price at which units trade may be above or below the close-ended fund’s NAV. Before making any mutual fund investment check the market condition.
If you’ve done your research and understand what an NFO is and what you can get out of investing in one, you may reap several rewards. When investors have complete information about a new fund offer and its activation date, they may make educated decisions about investing in potentially lucrative opportunities. Before committing to a purchase, it’s smart to familiarize yourself with the product’s terms and conditions.