Investing and trading in mutual funds has become a popular investment choice today; for some, it is their choicest hobby. After all, an MF is a great way to go beyond savings and make your money work on your behalf. However, for a first-time investor, certain terms such as an NFO may seem confusing. This guide will help you understand all about an MF NFO.
The definition
Asset Management Companies or AMCs launch new MFs from time to time. Well, when such companies do so, they can raise capital for the same by announcing it under the name of a new fund offer or NFO. One distinguishing feature of NFOs is that they are usually cheaper as they are new in the market. NFOs are marketed quite similarly to IPOs or Initial Public Offerings in which investors have the choice to purchase shares before getting listed on the exchange – where IPOs are the first offer made to the public for shares and subscriptions of a company; an NFO is the first offer of units made to investors of MFs.
Diving a little deeper
According to the regulations laid down by SEBI, a mutual fund NFO can stay active in the market for a maximum of 30 days. The offer price for such funds is typically Rs. 10; the collected revenue can then be used in acquiring securities of different publicly-traded companies that are listed on the stock exchange.
Once an NFO closes, any trade of a respective MF can only be made on the basis of the NAV or Net Asset Value of the fund. New fund offerings are considered to be profitable for investors as they can get access to respective units at fairly nominal costs. Naturally, the realised capital gains once the funds start trading in the open market are immense.
Types of NFOs
- Close-ended funds
Close-ended funds have a fixed corpus – meaning, they raise a fixed amount of capital through NFOs. Once the NFO period has expired, no fresh unit can be purchased from the AMC; however, the issued units can be freely traded on listed stock exchange markets. The units are sold based on the NAV of the fund.
- Open-ended funds
As opposed to close-ended mutual funds online, open-ended funds allows investors to enter or exit at any given time. These funds are officially launched after the NFO period has ended. These funds are bought and sold directly at a price per share, which is based on the value of the fund’s underlying securities.
Which is better?
Well, both open-ended and close-ended funds have their advantages. Where open-ended funds offer greater liquidity, close-ended funds offer stability and sustainable gains to the long-term investor. Where open-ended funds’ performance track record across different market cycles is available, the same is not for their close-ended counterparts. Finally, open-ended funds offer provisions for SIP or Systematic Investment Plan, something which close-ended funds do not offer.
Keeping such differences in mind, an investor must make an informed choice before investing in mutual funds India. Now, investing in MFs in as easy as using investment apps like Tata Capital Moneyfy App that give access to different MF schemes such as large-cap, ELSS, mid-cap, small-cap, and more. You can make an investment choice based on your risk appetite and other needs.
