What is a NFO and How to Invest in One
If you are looking at investing, there is a good chance that you are familiar with mutual funds. But only 7-8% of people in India own mutual funds, according to the monthly data published by the Association of Mutual Funds in India.
A new fund offer is when an asset management company offers a subscription to units of any new fund to investors for the first time. With this money, they buy stocks and bonds from the market based on the fund's mandate. They are marketed aggressively. As a result, you will hear about new fund offers regularly.
How does an NFO work?
Like a stock market has an initial public offer, mutual funds have a new fund offer. New funds are introduced to complete the fund house's product basket according to the Securities exchange board of India's (SEBI's) categorization of Mutual funds. They also can create an NFO for a fresh mutual fund theme in the market that they do not already offer.
When they market the NFO, the fund house will provide its investors with a scheme information document. This document will contain the fund's objective, managers' experience, risk level, future returns, fees, and expenses. The fund house will also create new units for this mutual fund scheme. The offer price of each unit is typically Rs.10. So, if the investment company wants to raise Rs.100 crores in an NFO, ten crore units will be created. You can subscribe to any of these units. If you wish to invest Rs 1 lakh, you will be allotted 10000 units.
This low price of Rs.10 is an offer price. The value of each unit may fall or rise once the fund starts operating.
A new fund offering allows investors to buy units of the fund before its net asset value is determined. In the above example, you have invested Rs.1 lakh in buying 10,000 units at the offer price. Once the mutual funds start operating, the net asset value of the fund may rise. Each unit may cost Rs.20.
The value of your investment is Rs. 2,00,000. If you decide to sell all your units at the premium price of Rs.20 per unit, you profit Rs.1,00,000.
The price per unit may also fall to Rs.8.If you sell 10000 units at Rs.8 per share, you will incur a loss of Rs 20,000.
NFOs can be cancelled if investors refuse to subscribe to them. These units are also open for only a limited period of 30 days.
You can directly invest in an NFO through ICICI direct. With ICICIdirect.com, you can open an online Demat account for free and have a hassle-free way to invests in new fund offerings.
Types of New fund offers
NFOs are mostly for mutual funds. They are either closed-end funds or open-end funds
A mutual fund comes up with a new fund offer of a closed-ended scheme. The issue is for a fixed amount of units. Once those units are sold through new fund offer, the fund is closed. If new investors want to buy units of that fund, they have to buy from an existing unitholder. They are listed on a stock exchange; new investors can buy via a brokerage firm on the secondary market. There is no new money raised. It is like buying a limited edition book. There are only a certain number of prints. If you need to buy one, you need to buy it from someone who already owns it.
Most mutual funds are open-end funds. New capital can be raised in this fund. Based on the market demand, the number of units in the fund keeps fluctuating. Unlike a closed-ended funds, open-ended funds are available to new investors through subscription and redemptions. They can issue an unlimited number of units. These can be bought through the broker or directly from the mutual fund.
As an investor, you cannot know if a new fund offering will be a success. One of the things to look out for is the fund's expense ratio and monitor the performance of other funds offered by the same investment company. Even if the face value of the units in the fund is low, the possibility of profit lies in the fund's performance.
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