NFO in Mutual Funds and their importance

NFO is an acronym for New Fund Offer. An Asset Management Company (AMC) may launch a new Mutual Fund scheme offering subscriptions to the public. Such a new mutual fund offer is known as NFO. The AMC issues NFO shares to raise capital for purchasing securities.

As per SEBI regulations, a new fund offering can remain active in the market for a maximum of 30 days. The offer price to subscribe to such mutual funds is Rs. 10, and the collected revenue can be utilised in procuring securities of various publicly traded companies listed on a stock exchange. After the subscription period is over, no further addition to the portfolio is allowed, and the NAV of the fund is determined based on the number of units in circulation for the total value of underlying assets.

Once the new fund offer closes, any trade of a particular mutual fund has to be done based on the NAV of the fund. NAV of the fund is determined based on the number of units in circulation for the total value of underlying assets. Any purchase or sale of mutual fund units has to be done through market exchange, similar to stock market trading. The price at which the NAV units are traded is subject to the overall demand and supply in the market, determining whether a unit is traded at a premium or discount.

NFC can be classified into three main categories viz. Open-ended funds, closed-ended funds, interval funds.

Open-ended Mutual Funds: Open-ended mutual funds do not have a fixed maturity period. The investor can purchase the units at any point in time and can sell back (redeem) units to Asset Management Company (AMC) at any time.

Close-ended Mutual Funds: In close-end mutual funds the scheme ends after a fixed maturity period. Normally the investor is not eligible to sell them back to the Asset Management Company before the maturity period.

Interval Mutual funds: Interval schemes combine the features of open-ended and close-ended funds. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV-related prices. Fixed maturity plans are an example of these types of schemes.

New fund offerings allow individuals to procure units of a mutual fund before its NAV has been determined, thereby allowing them to gain profits in the long run. No expenses/administrative charges are levied at the time of the initial offer. After a mutual fund starts operating, investors have to pay the respective net asset value to obtain each unit of the fund.

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