What is NFO in mutual funds? Importance and Benefits explained

There are different ways of announcing something special or important. At times, you may want to put in on social media platforms and tell everyone at once. At other times, you may want to arrange for a small get-together and share the big news personally. An Asset Management Company (AMC), too, has its way of announcing new mutual fund schemes. It can do so through New Fund Offers (NFOs). What is NFO in mutual funds exactly? Let’s find out.

What is NFO in mutual funds – easy explanation

AMCs launch NFOs to raise capital from investors. They do so by offering the units of new mutual fund schemes to investors like you for subscription for the first time. There are two types of NFOs – open-ended and close-ended.

Open-ended mutual funds can be like buses, where passengers can keep boarding and deboarding the vehicle throughout the journey. But close-ended mutual funds are like flights, where only a fixed number of passengers can board before the boarding time and leave the flight only when it lands.

In the case of open-ended funds, you can enter or exit the scheme even after the NFO period. Thus, the number of units in open-ended funds keeps fluctuating. But, in the case of close-ended funds, the number of units is fixed when the NFO is released. You can’t exit the fund before maturity. Similarly, no new investor can enter the scheme.

As per the Securities and Exchange Board of India (SEBI), NFOs can be open for subscription for a maximum of 15 days. Equity fund NFOs are generally open for 15 days, but debt fund NFOs are open for a short period, usually three-four days.

Why should you invest in an NFO? Benefits explained

Here are some advantages of investing in NFOs:

New investment strategies: NFOs bring new investment strategies for you to explore. You get an opportunity to invest in trending themes that can be potentially rewarding.  

Disciplined investing: Close-ended NFOs discourage you from exiting the scheme before maturity. You, thus, tend to stay invested for a longer period and gain from the power of compounding.

Fixed Maturity Plan (FMP) exposure: FMPs are debt mutual funds in India with a fixed maturity period. Fund houses offer FMPs only through NFOs. Such mutual funds are often looked at as an alternative to traditional fixed deposits. But they can be more tax-efficient than fixed deposits in certain cases.

Now that you know the advantages of investing in NFOs, you must also know that NFOs are not the same as IPOs.

How are NFOs different from IPOs?

A private company offers its stock to the public for the first time for subscription through an Initial Public Offering (IPO). In the case of NFOs, the AMCs offer the units of mutual fund schemes to the public for the first time for subscription.

While IPOs and NFOs both are launched to raise capital from the public, the former does it for managing debt, business expansion, research, etc. Whereas the primary objective of raising capital through NFOs is to buy securities keeping in mind the fund’s investment objective.

The listing price of an IPO is influenced by the company’s valuation. Valuations are not relevant in the case of mutual funds. NFOs are usually priced at Rs. 10. 

You need a demat and a trading account for IPOs, but not for NFOs.

IPOs and NFOs both offer different sets of benefits. If you wish to get IPO exposure, you can even do so through mutual funds that invest in recently listed or upcoming IPOs. This way, you can enjoy the advantages of both.  

To sum it up

NFOs involve the launch of new mutual fund schemes by fund houses. They bring in fresh investment themes and can help you create a diversified portfolio to maximise your overall investment returns.

An investor education initiative by Edelweiss Mutual Fund

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