NFOs are mutual funds that are into the business of managing your money. A fund manager of an asset management company keeps a constant eye on the equity markets, debt markets, real estate, currencies, gold, and commodities. The idea behind this exercise is to identify the areas from where he can earn money from the funds that he has invested.
Here’s a simple example that illustrates the logical flow behind investment in NFO. Generally, during Jan-March, there is a mad rush among various people to save taxes. Now, let’s assume that during the same period, the RBI governor has announced a cut or reduction in the REPO rate. This rate cut will help the business community to lower their interest expense, improve the profits, and thus, improve the performance of the entire equity market.
Given this scenario, a fund manager will launch a new mutual fund called as the tax savings fund or ELSS fund. He will market this new mutual fund by inviting corporates, individuals, banks, and financial institutions to invest money into this new mutual fund through a New Fund Offer (NFO). The fund manager will invest these funds into the equity markets, which have already benefitted from the RBI rate cut.
The investors in NFO can park their money in one go through a lump-sum investment or through investing a fixed amount of money at regular intervals through SIP. The mutual fund company provides you with units against the investment you make through the NFO. For example, if we assume the unit price is Rs 20, you will get 10,000 units if you invest a lump sum of Rs. 200,000 in the NFO.
A fund manager invites you to invest in NFO in two forms – close ended and open ended application. A close ended NFO will have a start date and an end date within which you should buy the units by investing in the NFO at the NFO price. However, an open ended NFO only has a start date. After this start date, all the units of an open ended NFO will be available only at the NAV and not the NFO price.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.