The concepts of mutual funds and asset management companies are well-known to all of us.
While mutual fund companies pool money from investors, asset management companies manage these funds, by diverting them into different investments.
When such companies need capital to continue their daily operations, they sometimes resort to raising funds from the public through the process of NFO.
What is NFO?
The full form of NFO in the stock market is New Fund Offer.
When asset management companies create new mutual funds and launch them to raise capital from the public, they are called new fund offers.
The meaning of NFOs is similar to IPOs. However, the owners of NFOs are generally asset management companies that raise funds to invest in shares of other companies.
NFOs are usually offered at ₹ 10 per unit. So, an investor wanting to invest ₹ 10,000 can buy 1,000 units of the fund.
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Types of NFO
- Open-ended mutual funds – These are mutual funds with no restrictions on entry and exit. Investors can subscribe or unsubscribe themselves from the fund at any time, i.e., they can buy and sell their units at any time, at the Net Asset Value (NAV) prevailing in the market.
NAV: The value of a fund’s assets minus its liabilities per unit.
- Close-ended mutual funds – These funds come with a maturity date. The new fund offers under this scheme are open for a stipulated period only. Post the expiry, investors cannot enter or exit from the mutual fund.
Investors interested in trading must wait for the fund to get listed on the stock exchange and trade directly on the exchange.
- Exchange-traded funds – These NFOs are listed in the stock market and are traded similarly to regular stocks on the exchange.
- Interval funds – This is a combination of open and close-ended funds. They are usually closed but open only during specific intervals where investors can enter and exit.
Pros and cons
Benefits of new fund offer investments:
- New fund offers provide diversification of investments. The asset management company diverts the funds into shares of different companies in varied sectors.
- Professionals possessing a thorough knowledge of the market manage these funds. Hence, they are relatively lower in risk than trading directly in the stock market.
- One unique feature of NFO is the price at which investors can enter into the funds. Since the price per unit is as low as ₹ 10, the profit margins can be high.
- Asset management companies offer different funds with varied features. So, investors have a variety of options to choose from, based on their requirements and goals.
Disadvantages of investing in new fund offers:
- Since asset management companies offer these funds with specialised services, the overall cost of investment in these funds is high. While the cost to invest in shares is low, the associated fees like legal fee, fund manager’s fee, etc., are high.
- These are new funds with no background. Hence, it is difficult to determine if the funds will work well and be profitable.
NFO vs. IPO
|New fund offer||Initial public offering|
|NFOs are new mutual funds raised by asset management companies.||IPOs are stocks issued by companies listed on the stock exchange.|
|Transactions happen through asset management companies in most cases.||Transactions directly take place on the stock exchange.|
|The price per unit is generally fixed, at ₹ 10.||The price per unit depends on various factors like the company’s financial health, past performance, competitors, etc.|
|The purpose of raising funds is to invest them in stocks and debts offered by public companies.||The purpose of raising funds is to take care of operations, repay loans and manage the business.|
|Investing in NFOs is less risky.||Investing in an IPO is relatively more risky.|
Points to consider before investing in NFOs
- One of the primary factors to consider before NFO investments is the reputation of asset management companies.
- Since these funds are new, it is not possible to judge them by their past performances. The only way to ensure the security of these investments is by assessing the creditworthiness of the asset management companies.
- The investment cost is another critical element to assess before investing in new fund offers.
Every new fund offer comes with a minimum subscription. So, the investor must consider the cost of buying the minimum number of units, including other charges like subscription fees, management fees, legal fees, etc.
- The asset management company usually shares the details of investments with all its investors. It is essential for investors to study the details thoroughly, as it contains the risks, conditions, types of stocks, returns, etc. It helps investors determine if the new fund offer meets their risk and return criteria.
- Some NFOs in mutual funds have a lock-in period. Investors must ensure to go through this, as they will not be able to exit from the fund before the expiry of the lock-in period.
The details of NFOs are available in the official website of Association of Mutual Funds in India (AMFI). They are also available on individual websites of the mutual fund companies and other financial portals like moneycontrol.
NFOs provide benefits in terms of flexibility, diversification and return on investments. But the risks and expenses they possess are high, too. While it may seem like a cheaper option than trading on the stock market, it is not always the case.
Some asset management companies invest heavily in marketing and publicity of these funds to attract investors. These costs are charged back to the investors.
Some brokers also demand a percentage of the profit apart from the brokerage fee. Hence, it is necessary for investors to analyse their options in depth before making any investments.
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