As an investor, you need to be aware of the various terms used in the stock market. It can not only help you understand the market dynamics in a much better manner but also push you toward making more favorable investment decisions. One of the many stock market terms that we’re going to be looking at today is NFO, which is used in the context of mutual funds.
Wondering what is NFO in a mutual fund? Continue reading to get to know all about it, the different types of NFOs, and the various advantages and disadvantages that they come with.
The process through which a fund house launches a new mutual fund is termed an NFO or New Fund Offer. It is akin to an Initial Public Offering (IPO), with the only difference being that IPOs are associated with stocks, whereas NFOs are associated with mutual funds.
When a mutual fund house wants to raise money to invest in a basket of securities, it issues an NFO. Interested investors may choose to subscribe to it by making a formal application.
A New Fund Offer is usually marketed very aggressively by the mutual fund house launching it. This is done to entice investors into subscribing to the offer. And just like an IPO, an NFO also has the potential to experience listing gains when it is listed on the stock exchange or publicly traded.
Now that you’re aware of what NFO in mutual funds is, let’s take a look at the different kinds that fund houses usually come up with.
A New Fund Offer with no limit on the number of units that investors can subscribe to is termed an open-ended fund. Such kinds of funds are usually not traded on the stock exchange and are instead managed by the mutual fund house. So, for instance, if an investor seeks to exit from an open-ended fund, they would have to sell the units that they hold back to the fund house instead of putting them up for sale on the stock exchange.
A close-ended fund, on the other hand, has a limit on the number of units that investors can subscribe to. These funds are traded on a stock exchange like stocks. Investors wanting to exit from a close-ended fund may put their units up for sale on the exchange. Buying and selling mutual fund units of close-ended funds are generally very easy.
An Exchange Traded Fund is a mutual fund that’s listed on a stock exchange and can be freely bought and sold by investors. Mutual fund houses generally prefer to launch ETFs through a New Fund Offer. ETFs typically track a commodity, an index, bonds, or other mutual funds like index funds.
The next section in our ‘what is NFO in a mutual fund’ guide that we’re going to take a look at are a few of the most noteworthy benefits and disadvantages of a New Fund Offer. So let’s begin with the advantages first.
1. Access to Emerging Sectors and Industries
Many of the New Fund Offers that mutual fund houses issue invest in emerging sectors and industries. As an investor, when you choose to invest in such NFOs, you get access to such sectors, which otherwise may not be available to you.
2. Great Way to Diversify
By getting investing in NFOs that, in turn, provide exposure to emerging sectors like renewable energy, you can bring about some much-needed diversification to your portfolio.
3. Ability to Participate in the Wealth Creation Process Early On
The NAV of many New Fund Offers generally tends to be lower than that of mutual funds that have existed for a long time. Therefore, by subscribing to such NFOs, you get to participate in the wealth creation process very early, giving you a huge head start.
1. No Track Record or Past Performance Data
Since an NFO is a new offer, there won’t be any track record of its performance whatsoever. This can make it harder for investors to properly analyze and conduct adequate due diligence. There have been many cases of New Fund Offers underperforming after they’ve hit the markets.
2. May Be Overvalued
NFOs that invest in emerging sectors and industries may come with NAVs that are overvalued. This can put them out of the reach of retail investors and may even go through corrections when they finally hit the markets.
Now that you’re aware of what NFO is in a mutual fund, should you still proceed to invest in one? The decision on whether to invest or not ultimately depends on you and your financial objectives. That’s not all. The decision to invest should always be backed up by facts and should be made only after conducting an extensive due diligence exercise.
That said if you end up deciding to invest in an NFO, make sure to check whether you have a trading and Demat account before making an application. If you don’t have one, simply visit the website of Motilal Oswal today. Then, you can open a Demat account and a trading account through a 100% paperless process from the comfort of your own home. And once you get your trading and Demat account opened, you can then freely proceed to invest in NFOs, upcoming IPOs, or other market-linked securities.