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How Does An NFO Work?
Editorial Team - Mar 14 - 9 min. read
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NFOs offer diverse investment opportunities at affordable initial offer prices. Understanding how NFOs work will help in capitalising on these opportunities for long-term wealth creation.
When you are on the lookout for an investment opportunity, the most popular option is a mutual fund! It offers options catering to investors with wide-ranging risk profiles.
Mutual fund schemes are introduced as NFOs and are quite profitable for purchase during their initial period along with the term insurance plan.
Given the numerous choices, diversified asset classes, and regulated procedures, it is vital to understand how NFO works before diving into investing in an NFO to ensure you make the right financial move as a novice or an experienced investor.
How Does An NFO Work?
A New Fund Offer is introduced by a financial institution or a fund house that can manage investment fund options. It can be an Asset Management Company, Insurance Provider, or any other similar organisation. Here is how NFO works:
Launch
The fund house launches an NFO to collect money from the public to invest in financial securities such as bonds, shares, or money-market instruments to suit a specific investment objective aligned to a risk profile.
Pricing
The NFO pricing for the fund options in India is generally fixed at an offer price of ₹10 per unit. It may be higher or lower depending upon the financial institutions.
Offer period
The NFO will be open for subscription for a limited period, generally 15 to 30 days.
Allotment of units
Investors can choose to invest in the NFO based on their affordability. The number of units allotted will be based on the amount invested.
Closure of the NFO period
After the NFO period ends, the investors can purchase the fund option at a predefined price that is generally higher than that of the NFO offer price.
New Fund Offers in life insurance policies are offered with wealth plans that provide the investment advantage with a life cover.
Our Tata AIA Life Insurance NFO Offerings cater to varied investment objectives ranging from long-term capital appreciation and minimal volatility risk to new-age sectors with mid-cap or small-cap stocks.
Types Of NFO
- Open-Ended Funds - Allows you to invest in the fund option or the mutual fund scheme at any time, even after the NFO period. It can be purchased at the current NAV corresponding to the business day.
- Closed-Ended funds - Allows you to invest in the fund option during the NFO period only. These investment schemes have a fixed tenure, and investments beyond that period are not allowed.
Benefits Of Investing In NFOs
Portfolio Diversification
NFOs are often introduced with specific investment objectives, such as agile for emerging trends, enhanced competitive advantage with new-age sectors, sustainable growth, and long-term capital appreciation.
Lower Price
As the NFO can be set at an offer price of ₹10, it can be higher or lower, to make them accessible to a broader range of investors.
Expert fund managers
NFOs are introduced, and professional and expert fund managers later manage the fund options.
Potential for higher returns
By choosing the best NFO that aligns with your risk profile and investing long-term, you can benefit from the fund's growth for higher returns.
Important Rules Around NFO
There are a few SEBI regulations that govern NFO:
- The fund house should provide a detailed offer document with the relevant information.
- At the time of NFO, the minimum subscription amount for the debt and hybrid-oriented schemes should be at least ₹20 crores, and that of other schemes should be at least ₹10 crores.
- The NFO amount collected should be from a minimum of 20 investors.
- No single investor can choose to have more than 25% of the investment corpus corresponding to the scheme.
- The fund houses should invest in the fund scheme based on the associated risk.
Tips For Choosing The Best NFO
- Understand the investment objective of the NFO to check if it aligns with your requirements.
- Consider the reputation of the fund house providing the NFO by checking their past investment record, fund options' performance, fund managers' experience, etc., to ensure the benefits.
- Know the features and the underlying investment strategy with the offer and policy document to avoid discrepancies later.
- Examine the nature of the investment to ensure it suits your risk profile.
- Learn also the minimum investment required and the exit load for the fund scheme to make well-informed decisions.
Conclusion
NFOs are introduced by fund houses for diverse investment opportunities at an affordable offer price for a limited period. Understanding how NFO works will help you make wise investment decisions aligned with your investment needs and risk profile. And finally, by evaluating the various NFOs, their features, and investment strategies, you can capitalise on the NFO opportunities.
