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What is NFO?

By Anurag Dixit

17th May 2022

2 mins read

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Is Spenny finally going to talk about Area 51? As similar as it may sound to the alien carrying device, NFO - New Fund Offer is something worlds apart (hehe, pun). New Fund Offer is to a Mutual Fund what crowdfunding is to a startup (loosely).

A bit puzzling, isn’t it? That’s why you’re seeing this stuff on Spenny’s blog section. So, stay with us till the end, and we hope next time an AMC prints a full-page ad regarding their new fund, it’d make much more sense than it does now.

What is an NFO?

The New Fund Offer is the initial fund offering by an AMC through which the fund provides the investors with a buy-in to a new fund. NFO is how the AMC raises funds to buy the assets for the funds.

Types of NFO

  • Open-Ended Funds - They permit continuous buying and selling of the funds at prices based on the NAV. They create new units based on the investment.
  • Closed-Ended Funds -  They issue fixed units in an NFO. Once it is completed, no more investors can buy in.
  • Interval Funds - These are closed funds open for investment at regular intervals by default.

Advantages of NFO

  • Lower NAV - Most AMCs offer the funds at a NAV of ₹10, and these NAV can exponentially rise after the fund is reopened for the subscription.
  • Newer investment strategies - As per SEBI guidelines, an AMC can only offer one fund with an investment strategy. So, if an investor trusts the performance of an AMC, he can invest in a new strategy provided by the house.

Possible Dealbreaker

  • Risk Factor - Although the NFOs offer new investment strategies, they bring inexperience with them. The AMCs are inexperienced in managing the proposed system, and all one can rely on is the performance of AMC in existing funds.
  • NAVs can be misleading - It might seem that the lower NAV is the selling point, but funds offer partial units based on the NAV, and the percentage change in the NAV is more important than their actual costs.

FAQs

What is NAV?

Net Asset Value or NAVs are analogous to the price of a stock, the only difference boing that they represent equity while the NAVs represent the cost of a unit of assets. Unlike conventional stocks, the other difference is that one can buy partial assets based on the invested amount and the prevailing NAV.

How is the risk factor decided?

The risk factor is decided based on the riskometer, consisting of 5 colours. The risk is determined based on the guidelines laid by SEBI regarding the underlying asset.

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Made with ❤️ in India