Understanding NFOs: 5 Things you must know about this investment instrument

TomorrowMakers ™

Understanding NFOs: 5 Things you must know about this investment instrument

22 January 2018
Are you an investor looking to diversify? NFO is one of the options you can surely consider to invest in. Read this to know NFOs in detail

The concept of NFO is becoming increasingly popular. With the equity markets performing well, many NFOS have been introduced by mutual fund companies.  The total number of NFO’s launched between the year 2009-2013 is equal to the number of NFO’s launched last year. To avoid any further confusion about what NFOs are and how to invest in them, let's delve deeper.

1. What is NFOs
A NFO or a New Fund Offer is when a new fund is introduced, and is offered to the public before it is opened to the daily transactions. A new fund offer is the first offer by an investment company for subscribing to a new fund. When a new fund is launched, the NFO helps the company to raise the capital for buying securities. One of the most popular new fund offerings are the Mutual funds.

 

2. How to invest in them
Commonly, the NFO’s can be of two types – Open-end funds and 
close-end funds.  To know, how to invest in a new fund offer, go through the details below:


Open-end funds: An open-end fund NFO can be bought on its launch day. There is no limit of shares in the case of the open-end funds. These funds are managed by the fund company. You can trade these funds with a broker as these shares do not get traded on an exchange.The Open-end funds announce its NAV ondaily basis when the market closes.

Closed-end funds: The Closed-end fund NFO issues only a limited number of shares during its launch. These funds are generally the most highly marketed new fund offerings. Closed-end funds are traded on an exchange. One can buy this type of fund on its launch day through a broker.

3. Before buying any NFO, you must evaluate the value proposition of the NFO meticulously to understand whether it is lucrative for your portfolio.

 

4. What are the pros of investing in NFO?
Certain NFOs may offer uniqueness from other funds and offer opportunities not available in other funds.  
These being new offerings, at times you may be able to invest at lower costs

Related: Investment instruments you should consider while you are young [Infographic]

5. What are the cons of investing in NFO?
Since NFO’s are introduced as a new idea, there is no proven record or the certainty of the future of the fund.
Some people think NFO’s are cheap in price, but they are not. It is priced almost like an ongoing scheme.
The initial charges and expenses of NFO are high, which the companies recover from you.
NFO offers a limited diversification 

Related: Rupee-cost averaging: Why SIPs are more profitable?

You can do a proper research and browse the websites of the different companies that come out with NFOs to check the launch date, close date, minimum investment, tenure, and maturity date of the NFO that suits your profile.

Related: Stop thinking you don’t have enough money and start investing

Bottom line:

To an extent, NFO is like an IPO because here also you can buy shares before it is listed. The companies often launch attractive and enticing marketing campaigns to promote their NFOs as when the NFO’s start trading publicly; it brings substantial gains to the company.

 
 

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