Explained: What is mutual fund NFO?2 min read . Updated: 27 Jul 2019, 08:35 AM IST
- In an NFO, you can subscribe to the units of the new fund, which is being launched, at an offer price which is usually set as ₹10
- After the NFO, an open-ended mutual fund becomes available for purchase and redemption on an on-going basis at the net asset value
Whenever a fund company launches a new mutual fund, it conducts the launch through a process known as a new fund offer (NFO).“This applies to both, open- and closed-ended mutual funds. In an NFO, you can subscribe to the units of the new fund, which is being launched, at an offer price which is usually set as ₹10. So if you invest ₹1 lakh, you will be allotted 1,000 units. An NFO can be cancelled if the investors do not show much interest in subscribing to it," said Ankur Choudhary, co-founder and chief investment officer, Goalwise.com. For example, equity schemes are required to get a minimum total investment of ₹1 crore during an NFO. “The main objective of an NFO is to raise capital from markets to further invest in various asset classes such as stocks and bonds," said Vijay Kuppa, co-founder, Orowealth.
WHAT IS FURTHER FUND OFFER (FFO)?
“After the NFO, an open-ended mutual fund becomes available for purchase and redemption on an on-going basis at the net asset value (NAV) published by the fund house," said Choudhary. However, it is different with close-ended funds. “New units for closed-ended funds may only be issued through a Further Fund Offer (FFO).
In an FFO, new units are made available for fresh purchase to existing or new investors at an offer price which is close to the current NAV of the fund. FFO allows the fund to take in much more investments after its initial subscription," said Choudhary. A fund can have any number of NFOs. “FFOs’ offer price is referred to as a reference market price and is in line with the current traded price. Several times, you will be given FFOs at a discounted market price," said Singh.
WHAT SHOULD YOU DO WITH NFO AND FFO?
“In general, it is not a good idea to subscribe to NFOs because there is no track record for that fund. And today there is no dearth of funds with good tracks in any theme, so it does not make much sense to invest in an NFO," said Chowdhary. In the case of FFOs of closed-ended funds or exchange-traded fund (ETF), you still have a performance history to monitor.
“In an FFO of a closed-ended fund or ETF, the experts have recommend investors to evaluate the track record of the fund, its expense ratio and the returns till date. The NFOS or FFOS are not like initial public offering (IPO) in the stock market, in the sense that they don’t offer any scope for quick returns that investors generally tend to associate with IPOs," Chowdhary added.