New Fund Offer (NFO) is used by AMC’s to offer a scheme to the public for the first time.It contains details of the Mutual Fund scheme offered and in a way it can be compared to an IPO.
What is New Fund Offer (NFO)
A Mutual Fund AMC uses New Fund Offer (NFO) to raise money from the market for the new scheme. It is for a limited period of time in which the investor can invest money in the prescribed value(generally it is Rs 10 (NAV), and after the offer is over it can only be bought at the prevailing market rate.If the New Fund Offer (NFO) is for a closed Mutual Fund then investors can only buy it during the initial offer and may exit it only after the duration as mentioned in the NFOP.
Procedure of making of New Fund Offer (NFO)
Based on the input from various sources and also as per the prevailing market condition, the Mutual Fund AMC decides to launch a new scheme.The New Fund Offer (NFO) is prepared after concurrence and approval of the trustee and board.It is then filed with SEBI and the observations if any by SEBI are incorporated.A suitable timetable is decided for the new offer which includes dates for NFO open and close and then it is launched in the market for the public. The next stage is the marketing and promotion of the NFO.
Contents of Offer Document
Offer Document is used by AMC to launch the New Fund Offer (NFO).It contains all the details that are necessary for the investor’s knowledge to make an investment decision. It contains details of the scheme, its risk, hence category objectives etc. It is made strictly as per the format as prescribed by the SEBI.As the investment in the scheme is on the premise that investor has purchased only after reading the scheme documents hence it is important to read it thoroughly.The Offer Documents has two parts namely Scheme Information Document(SID) andScheme Additional Information(SAI).
Why Should You Not Invest In NFO?
High Initial Expense
No Past Track Record
The Misnomer of Cheap NAV
When should you invest in an NFO?
Having seen reasons as mentioned above regarding why to avoid an MF NFO, the question arises whether there are some cases or circumstances when you should invest in the NFO. Well sure there are, some of them are as follows-
Unique Fund Missing from your portfolio
NFO by your Favourite Fund Manager
As Mutual Fund investment is based on the principle of caveat emptor, meaning let the buyer be aware, it is important that an investor understands all the risks involved in investing with NFO. It is always better to avoid the NFO and instead invest in Mutual Funds which are long established and have a good long track record. However, if you do decide to invest then you must read all the important documents related to the New Fund Offer (NFO) before making the investment decision.