If you are or want to be a mutual fund investor, you must master the art of timing your investments. Because mutual funds typically invest in stocks or debt, understanding when to invest is just as crucial as knowing where to invest. So, what exactly is NFO? Simply put, it offers you a fantastic opportunity to improve the returns on your assets.
What are NFO Mutual Funds?
When a mutual fund house or AMC (Asset Management Company) decides to establish a new mutual fund scheme, they issue a New Fund Offer or NFO. As a result, the simple answer to the question “What is NFO in mutual funds?” It is an inaugural offer of a mutual fund plan that allows investors to catch a fund early and gain substantial rewards.
An NFO enables a mutual fund house to raise funds for the purchase of stocks or debt instruments. AMCs typically provide a subscription period of ten (10) to fifteen (15) days for consumers to purchase units at INR 10 per unit NAV. AMCs issue units to investors on a first-come, first-serve basis.
Are there different kinds of NFO Mutual Funds?
The big-time answer for that is – yes, there are, and here they are:
1) Open-Ended: An open-ended mutual fund allows for entry and exit at any time. You could invest in an open-ended mutual fund in three ways: as a lump sum during the NFO period, as a lump sum after the NFO period, or as a systematic investment plan (SIP) (Systematic Investment Plan). Some stock and debt mutual funds, however, impose an exit load on withdrawals made before one/two/three years from the investment date.
2) Close-Ended: A close-ended mutual fund scheme, as the name implies, does not permit premature withdrawals. Except for ELSS, these funds typically do not allow SIP investments (Equity Linked Savings Scheme). ELSS funds are chosen by investors seeking Section 80C tax benefits of up to INR 1.5 lakh. Closed-ended mutual funds typically mature three to four years following the date of investment.
Now, the categories of open and close-ended funds are applicable everywhere – in every kind of mutual fund. For instance, even if you look at the Top large cap mutual funds, mid-cap, or any other fund for that matter.
The Rules Around NFOs
The mutual fund business launching a new scheme must also ensure that the money collected during the NFO is collected from at least 20 investors. Furthermore, no single owner owns more than 25% of the scheme’s corpus, ensuring that the investment amount value is not concentrated among a few investors.
In mutual fund jargon, this criterion is known as the 20-25 rule, and every NFO must follow it. In fact, all mutual fund schemes must follow the 20-25 rule at all times.
What Happens After?
When a new scheme’s NFO period expires, the mutual fund company allots the scheme’s units within five days. If you do not receive an allotment, for example, due to insufficient know-your-client (KYC) rules or errors in application forms, the fund house recovers your application fee.
However, if the mutual fund scheme is open-ended, you can continue to buy units even after the NFO. Open-ended mutual fund schemes are ones that allow investors to enter and depart at any time.
Not all mutual fund schemes enable you to purchase units after the NFO period has ended.
Closed-ended funds are a sort of mutual fund scheme in which you can only buy units during the NFO. Closed-ended mutual funds do not allow investors to enter or quit at any time. As a result, such schemes can only be invested during the NFO period.
What is the Distinction Between an IPO and an NFO?
While many investors confuse an NFO with an IPO, the two are as dissimilar as cheese and chalk.
- First and foremost, an IPO is either a new round of funding for the firm or an offer to sell the company’s stock (OFS). An NFO, on the other hand, is for new fundraising, and there are no limits to the value of money that could be raised.
- Second, quotas for individual investors, NICs, and QIBs are separate in company IPOs. Some IPOs even provide a bonus discount to individual investors. In the case of mutual fund NFOs, however, there are no such specific incentives for retail investors.
- The essential part of valuation in IPOs is the P/E ratio, EV/EBITDA ratio, and P/BV ratio, which are used in IPO pricing. An NFO does not require an appraisal because the funds collected are simply divided into units and invested in the market.
- The use of funds in an IPO is critical because it determines whether the IPO money adds value to the investor or not. In the case of NFOs, the market level is more crucial because it determines at what valuations the fund would invest.
- As a quality IPO attracts a higher valuation, the IPO price reflects the company’s perceived value. When it comes to NFOs, most fund NFOs are priced at Rs.10, although this is only suggestive. What is important is the level at which these funds join the market.
- Depending on demand, market conditions, and news flows, an IPO may list at a premium or a discount to the issue price. However, in an NFO, marketing, administrative, and other expenditures are deducted from the fund. Therefore NFOs often begin with a lower NAV.
- Finally, the IPO price is determined by supply and demand dynamics. Only the price range is known in advance, and the precise price is discovered during book construction. The NFO has no bearing on demand or supply, and it just has an indicative unit value.
An IPO is a public offering conducted by a corporation seeking to raise funds from the general public. There are two sorts of IPOs. To begin, there are Fresh Issues in which the corporation raises new funds in the market. This funding could be used for expansion, diversification, debt reduction, and so forth. Second, corporations do an Offer-for-Sale (OFS), in which promoters or early investors sell their stake through the IPO. In the case of OFS, the share capital stays unchanged; the firm is just listed.
Mutual fund houses or AMCs, on the other hand, launch NFOs. An NFO’s goal is to introduce a new fund concept to the market. NFOs are typically concentrated near market peaks. Of course, many of these NFO concepts may be limited after SEBI issues new MF restrictions on fund categorization. The second most common source of NFOs is AMCs attempting to fill gaps in their fund offerings through NFOs.
Both IPOs and NFOs involve soliciting funds from the general public. NFOs, like IPOs, are only available for subscription for a set length of time. However, IPOs are often closed in three days, whereas NFOs typically remain open for 15-20 days. NFOs, like IPOs, incur expenditures in the form of marketing, administrative, legal, and compliance fees, among other things.
Second, both an IPO and an NFO are typically timed to coincide with periods of rapid growth and solid stock market returns. SEBI regulates both NFOs and IPOs, encompassing all aspects from filing the prospectus to monitoring the actual allocation of money.
At all times, it is essential to put your judgment and wisdom first. Moreover, it is hard to miss an NFO opportunity since there is so much that goes into its promotion of it.