NFO is an abbreviation for New Fund Offer; this is when units of a mutual fund scheme are offered to the public for subscription for the first time or it is the first subscription offering for any new fund being launched by an investment company. New schemes are being introduced into the market by either existing fund houses or when a Mutual fund scheme is launched for the very first time, they usually come in the form of NFOs.

Following are some important points about NFOs:

1. Introduction of new scheme: NFO denotes introduction of new mutual funds schemes by a particular AMC. Consequently, this will enable the AMC to raise money from investors which shall be invested in line with the investment objectives of that particular scheme.
2. Time period within which subscription can take place: During the NFO period, investors can buy units of the mutual fund scheme at the offer price. Sometimes, NFOs may remain open for as short as a few days or weeks.
3. Unit prices during NFO: The unit price during NFO period is typically set at par value such as ₹10 per unit; accordingly, it means that investors can subscribe to units at this offer price before end of NFO period.
4. End of NFO Period: Once the New Fund Offer (NFO) is closed, units of schemes being offered are allotted to investors at applicable Net Asset Value (NAV) that was determined as per the close of NFO period. The first NAV might differ depending on how the scheme assets have performed during the NFO.
5. Marketing and Promotion: Marketing activities such as advertisements, distributions of marketing materials, and promotional events are some of the techniques used by most fund houses to lure potential investors into subscribing for their NFO.

An investor should consider thorough investigation into mutual funds schemes – its investment objective, strategy, past performance (if any for existing fund house), risk factors associated with such investment before opting to invest in an NFO.

NFO advantages:

1. Investment in NFO’s: Fresh mutual fund schemes are launched by NFOs that give investors an opportunity to invest right from the beginning. This may be appealing to individuals who would like to start afresh and observe the journey of a fund since its inception.
2. Expense ratio: In case there is a New Fund Offer (NFO), any costs incurred will not be borne by the scheme. However, expenses as well as expense ratio come into effect once the scheme is introduced.
3. Low NAV entry: Price of NFO units is usually at a fixed rate, mostly Rs. 10 per unit. As such, they are within reach for people with small budgets thereby allowing them to begin with a relatively low initial investment.
4. Better opportunity for higher returns: The fund’s performance could reward you if it has been managed well and your financial goals are similar to its investment objective over time.
5. Professional Management: NFOs are managed by experienced fund managers who make investment decisions based on the fund’s objectives and market conditions, potentially enhancing the chances of achieving your investment goals.

NFO Disadvantages:

• Since a new fund has neither track record nor ratings, it is hard to evaluate the investment strategy execution as well as expertise of its fund house.
• NAV is not determined by demand and supply unlike shares. There are no unique incentives presented by NFOs at inception.

Why should anyone invest in NFO’s?

NFOs are appropriate for investors who have long term horizon for their investments and are willing to take risks associated with new schemes. It’s important to note that all documents related to the scheme should be read carefully before making an investment decision.

Are NFOs a Good Investment?

However, caution should be exercised whilst investing in an NFO that has no history of proven performance as such although it may come with a potential for large profits.

How Can I Find the Right NFO?

By keeping an eye on different companies’ press releases or following news links about new fund launches such as at The Closed-End Fund Center.

Things to Keep in Mind Before Investing in NFO Funds:

1. Fund scheme objective: The scheme’s objective is the first thing you should consider before investing in an NFO. As the fund is new, it may have a unique theme and objective. Hence you should check that the fund is aligned with your investment objective and risk appetite.
2. Past performance: As the fund introduces a new scheme in NFO, there is no past performance. So, in this case, you must consider the performance of similar schemes of the fund house, and the basis on that; you should make an investment decision.
3. Fund Manager: Before investing in the NFO, you should also consider the performance of the fund manager. You can do this by analyzing the funds that the fund manager already manages.
4. Expense ratio: Before investing in the NFO, you should consider the expense ratio and compare it with ratios of similar schemes of the fund house.

How can I invest in an NFO?

You can invest in an NFO through various channels directly through online investment platforms like Groww, up stock and zerodha or through brokers and fund houses (online and offline modes). You can visit the fund house website directly, do the KYC process, and apply for the NFO. You have the freedom to choose the number of units and the foundation for which must-you-pay. After you applied for NFO units, if it is successful, within five days, fund house will credit mutual fund units.

Regulations for an NFO:

NFOs are required to meet several specific subscription thresholds under the SEBI regulations:

• It is compulsory that debt-oriented and balanced hybrid schemes have a minimum of Rs 20 crore as subscription fee during NFOs, while other schemes must have at least Rs.10 crore.
• NFO collections should involve a minimum of 20 investors to ensure broad participation.
• The rule of 20-25 says no single investor can hold more than 25% of the corpus or else it will lead to concentration in investment.
• Fund houses launching NFOs must invest in the scheme, with SEBI now urging increased investment based on scheme risk levels
• Although SEBI has directed greater skin-in-the-game involvement, implementation specifics remain pending clarification, potentially impacting fund allocation across different schemes.

What Happens After NFO?

On closure of the New Fund Offer (NFO) period, a mutual fund company allows units of the new scheme in about five days. If you do not get an allotment e.g. due to incomplete KYC norms or errors in application forms, the fund house will refund the application money.

However, even after NFO, you can still buy into units of the mutual fund scheme if it is open-ended. These are schemes which offer entry and exit to investors at any time. However, some types of mutual fund schemes do not allow one to purchase after-New Fund Offers period.

Another type of Mutual Fund Scheme is Closed Ended funds where you can only buy units during the NFO. Therefore, investors cannot enter or leave closed-ended mutual fund schemes any time they feel like, and this implies that investments in these schemes can only be made during their New Fund Offers period between 15-30 days.

Differences between NFO and IPO?