Lesson #5: What Is an NFO?
Start Your SIP in Mutual Funds.
In this lesson, we will now learn what is an NFO (New Fund Offering) or how does a mutual fund scheme starts?
When we invest in any mutual fund scheme, there is a point when it got started, many started decades ago, a few started months ago and many are going to start now or in the future.
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How Does It Work?
A mutual fund company or asset management company is companies that start and manage mutual fund schemes under different categories.
An Asset Management Company can manage multiple mutual fund schemes. So, when an AMC decides to launch a new scheme that’s called NEW FUND OFFERING or NFO.
Creation of Folio Number
So, when an investor invests money into any mutual fund scheme, the Asset Management Company of that scheme then creates a unique account number for that investor, this account number is commonly known as folio number.
Whenever an investor invests money in any mutual fund scheme then they are further allotted units of those schemes under that folio number.
New Fund Offer (NFO)
In the case of NFO, the AMC launches it at Rs.10 NAV so the investors who put money into the NFO are allotted the units of the New Fund at Rs.10 NAV, which means that if you invest Rs.1,00,000 then you will get 1000 units of that fund.
Now, whatever investment this new fund collects from all investors is further invested and managed by Fund Manager who invests the entire amount in the securities market as per the fund mandate and grows money in that fund.
For example, A New Fund collects Rs.1000 Crore after its launch from 1 Crore investors each investing Rs.1,000 in the fund. Now each investor received 100 units as the value of each unit is Rs.10.
So, if after 1 year the scheme’s net worth rises to Rs.1500 Crore (assuming no one puts in fresh money or makes a withdrawal from the fund), this means each investor’s money also increased to Rs.1500 as the price of each unit will be Rs.15.
Conclusion
But investing in NFO doesn’t make any difference or gives you a steal deal because most investors misunderstand NFOs as IPOs and find it a steal deal by applying at NAV of Rs.10.
Rs.10 NAV is not cheaper or costlier because the fund is going to Invest the amount collected at current market levels as per their respective fund mandate & objective.
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End of Lesson #5, Click here for Full Course.
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Hi, I’m Managing Director at Gurpreet Saluja Financial Services where I help my investors to invest in mutual funds and achieve their financial goals. I’m also a Value Investor and here I write about Personal Finance & Investing.
