A New Fund Offer (NFO) occurs when an Asset Management Company (AMC) wants to raise capital from the general public for the first time for a particular fund or scheme. The AMC uses this capital to purchase bonds, equities and other financial instruments. A classic example of a NFO is when a mutual fund house launches a new mutual fund scheme.
Understanding NFO
In a NFO, potential investors have a limited time period to subscribe to the new fund scheme. As per SEBI rules, in India a NFO can remain active in the market for a maximum of 30 days. New Fund Offerings have a potential of making better gains after listing. In India, normally, a mutual fund scheme is launched at a face value of INR 10. After listing, any trade of a mutual fund is done based on the NAV of the fund.
Types of New Fund Offer (NFO)
Open End Fund
In an open ended fund, purchase and redemption of fund is allowed from the launch date and thereafter. The prices are linked to the NAV of the fund. The fund reports NAV daily after the market’s close. These funds do not trade on the stock exchange and are managed by the mutual fund house. An example of an open end fund would be – Large Cap Equity Fund or BlueChip Equity Fund.
Closed End Fund
Closed end funds issue only a specified number of shares during their new fund offer. These funds trade on an exchange with price quotes throughout the day. They also have a fixed maturity period. Investors cannot purchase or redeem units of a closed end fund after the NFO period ends.
Exchange Traded Fund
Exchange traded funds are also launched through New Fund Offer (NFO). An exchange traded fund can be publicly traded on the stock exchange. In India, most of the exchange traded funds are registered with SEBI. These funds can be bought and sold on the exchange during trading hours.
Pros & Cons of investing in a NFO
| Pros | Cons |
| Low investment cost as it opens at INR 10 | Higher expense ratio |
| Normally launched in the bull phase of the market | No track record of success or failure |
Initial Public Offering (IPO) v/s New Fund Offer (NFO)
There is a distinct difference between IPO and a NFO. Let us see the major points of differences.
| IPO | NFO |
| IPO is offered by a private company to the general public. | NFO is offered by Asset Management Company (AMC)/ mutual fund house to general public. |
| IPO involves issue of equity capital of a ‘single’ company in return of cash | NFO involves pooling of capital to invest it in equity of various companies, bonds and other financial instruments. |
| After the IPO, shares of a company can be bought and sold on the stock exchange during trading hours. | After the NFO, an open end fund (which is the vast majority of mutual funds) does not trade on stock exchange. Investors can purchase or redeem units of the fund by placing a request with the mutual fund house. |
| After listing, the share price of the stock is used for valuation. It fluctuates based on factors like perception of investors about the company. | After listing, the Net Asset Value (NAV) of the mutual fund scheme is used for valuation. The NAV reflects the current value of the scheme portfolio. |
| Market value of investment = Share price x Number of shares | Market value of investment = NAV x Number of fund units |
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