When a new scheme of any mutual fund is launched, it is known as New Fund Offer (NFO) as this fund is newly introduced. While IPO is for stock markets, NFO is the same process for Mutual Funds. In case of NFO, it is launched by the mutual fund investment company (also known as Asset Management Company).
NFO is launched to raise funds and start a mutual fund scheme to provide returns to the investors. Mutual fund company/ AMC uses the funds raised during NFO to purchase stocks, bonds and other instruments.
Why invest in NFO? As NFO is the first offer of units in a mutual fund scheme, it is sold/ allotted at a cheaper price. Most of the NFOs offer units at Rs. 10/- which is the starting price. NFOs are attractive as their price are low. However, there is risk as there is no past record of this new scheme unlike other existing schemes which are already existing over a period of time.
Can the price of units go below NFO price? Yes, if stock market goes down drastically at times the mutual fund scheme’s per unit price goes below the NFO price. But this happens for rare cases.
When can I exit? Once the NFO is closed, Mutual Funds companies will allot you units. This happens within 7-10 days of closure of NFO. For open ended mutual fund schemes, you can sell or hold your units bought via NFO once the fund is open/live. Close ended funds will have 3-5 years lock-in period, you have to wait till lock-in period is over for selling.
Is SIP possible in NFO? No. NFO is only for lump sum purchase. Once fund is open post NFO, you can start SIP in open ended schemes.
What do I need to buy mutual fund during NFO? You will need to complete mutual fund KYC if not done before and money in your bank account. You do not necessarily need a DMAT accounts for mutual funds.
In case you have missed out applying during NFO, you can purchase subsequently once the fund opens. This is possible only for open ended schemes.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds is not necessarily indicative of future performance of the schemes. The Mutual Fund is not guaranteeing or assuring any dividend under any of the schemes and the same is subject to the availability and adequacy of distributable surplus. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme.