What is NFO in Mutual Funds?

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New Fund Offer

What is NFO?

NFO is the short form abbreviation for New Fund Offer.

According to Investopedia, NFO is the first subscription offering for any new fund offered by an investment company.

NFO occurs when a company launches a new fund to allow people to buy fractions of the fund for the first time.

This also allows the company to raise money to purchase securities which often happens with mutual funds as the most common form of new fund offering.

How does NFO work?

An NFO usually has an initial subscription period where investors get to buy a fraction of the fund at a lower price within a pre-defined duration of time.

Investors who make purchases of a fraction of the fund at this time often tend to make much more returns/gains than those who buy at a later date.

When a new fund gets created, it has to go to an investment company or an asset management firm for it to be launched.

As a potential investor, you should review the types of investment securities that are in the fund, the fund manager as well as other information and credibility of the said company.

Types of NFO

There are three types of NFO:

1. Open-end fund

An open-end fund announces new shares for purchases on a specified launch day and does not limit the number of shares you can buy as an investor.

Units can be bought and sold on the actual launch date and days after but it has to be done through a broker or a brokerage firm. 

Open-end funds are not traded on an exchange.

2. Closed-end fund

Unlike the open-end fund, the closed-end fund limits the number of shares you can buy as an investor.

They are also traded on an exchange where you will get a daily quote price throughout the day. 

Closed-end fund are often the most sought and the most highly promoted/marketed new fund issuances since there’s only a limited number of available shares during the new fund offer.  

3. ETFs (Exchange-Traded Fund)

An exchange-traded fund is a type of new fund that can be publicly traded on the stock exchange market.

Read more about ETFs.

Differences between NFO and IPO

1The investment firm or asset management company will set the priceThe issuing company will set the price
2Your investment goes to the investment firm or asset management company Your investment goes to the issuing company
3Buying and selling activities occur through a brokerage firm or the investment firmBuying and selling occur through the stock exchange

Is it good to invest in an NFO?

Investing in NFO might be a good investment decision, as you tend to earn more interest on your investment. However, you should be careful of the “fear of missing out” (FOMO) and ensure that you carry out due diligence before making an investment decision. 

As an investor, you should also be careful of investing your money in a fund or an investment company with no track record of success. 

Is NFO better than IPO?

In this case, no one is better than the other, what matters is your nature and risk tolerance in terms of investment. 

How is NFO different from mutual funds?

Every mutual fund has a starting point which is usually the NFO; the initial opening for you as an investor to purchase a mutual fund at a particular price within a period of time. 

What happens after NFO?

Once the initial period of an NFO elapses, the investment or asset management company allot the unit of the mutual funds to investors.

Bottom Line

In your journey towards wealth building, do due diligence before putting money in any investment security.

Learn More:

Initial Public Offering (IPO): What it means in Stock Market

ETF vs Mutual Funds

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