NFO stands for New Fund offer. It is like stock IPO. In IPO new stock is released for the first time investment. Whereas in new fund offer mutual fund is released for the investor by the mutual fund companies for the first time. The NFO remains open for fixed time duration. NFO price in mutual fund is generally fixed at Rs.10 per unit. On expiry of NFO period the fund is listed in the market. After listing of mutual funds investor can purchase fund from the open market. NFO are generally available at higher price after listing.
Types of NFO
Open Ended Funds
Open Ended funds is available for all the investors. Under this category the investors and NFO subscribers can sell/redeem their mutual funds unit anytime. Exit load is applicable on this type of funds. No lock in period applicable.
Closed Ended Funds
Closed Ended funds are available with fixed period 3-5 years. Investor cannot exit closed ended fund before specified lock-in period. In the simple words closed ended mutual funds have specific tenure and fixed maturity period.
Factors to consider before investing in NFO
You should consider following factors before making investment in NFO.
Fund House Reputation
Fund house reputation is utmost important before investing in NFO. The fund house where you are investing your money should have history of operating in mutual fund industry at least for 5-10 years. You can analyze the performance delivered by the fund house in various mutual funds in the same category. This increases your chance of getting higher returns from fund.
Theme of Fund
Theme of fund is another important factor to consider while making investment. There are many themes available in the market. The theme where you are investing your money should be evergreen and sustainable for the long term. You should consider fund for the time period of at least 5 years.
Fund objective is next factor to consider while investing in NFO. The fund objective contains information such as asset allocation, risk and other things. You should carefully study fund objective before investing in NFO. The fund objective help you to know that what fund manager is expected to do with your invested money.
You should check return potential of similar funds already available in the market. The NFO prospect does not tell anything about return however, you can set expected returns based on fund objective and other parameters.
You should also consider risk factor while investing NFO. New fund does not have fund performance history this means it will be difficult for you to predict fund performance and associated risk. The fund may give you better return or may end up making losses.
Minimum Subscription amount
The fund offer document contains information about minimum subscription amount. The amount is in range of Rs.500 to Rs.5000. If minimum subscription amount is higher compared to what you can invest you should consider SIP option for investment instead of lump sum investment.
Market Condition is another important factor while making investment. The market condition should be stable or non-volatile while making investment. You may end up making losses in near term if you do not consider market condition while investing in NFO.