Mutual Fund Unlocked: New Fund offer (NFO)

As the equity markets are again trading in the green zone, the investors are looking to get into new investment opportunities. Mutual funds are no more a new and unknown concept for the investors. With the market regulator's campaign 'mutual fund sahi hai' people are more aware of these investment vehicles. However, investors often get confused about NFO, that is, New Fund Offerings. As they look cheaper but have no history, so what are they exactly? Let's explore what are NFO and how do they work.

A new fund offer (NFO) is the first time offer for subscription from newly launched fund. The new fund offers are launched to raise the capital in respect to buy the shares or securities or bonds for the fund from the market. These offerings work similarly to IPOs. NFO also comes up with the prospectus which gives all the information about the fund.

The NFO pools in money from the investors and then starts investing it in a set of securities, based on its stated strategy as per the offer document. At the time of NFO, the fund does not hold any stocks or securities, therefore investors have no portfolio to bet on or find the valuations of the fund. The NFO starts with a price Rs. 10 to allot units and has no underlying instruments. Its NAV changes as soon as it starts deploying the pooled-in money and based on the movement of price of the stocks that it includes in its portfolio. These funds can be open or closed ended and in the absence of a history of their returns the only way is to analyse them is through the offer document which gives an insight on the fund management.

These funds form a good option for investment but it is advised that investing in these funds should be done with proper awareness about their risks as with no history it might be a risky affair for the investors.