What is the NFO Allotment Process? How Does it Work?

What is the NFO Allotment Process? How Does it Work?

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An NFO is how the asset management company launches a new fund on a first subscription basis for financing and buying securities. Well, for starters, you do know how an AMC works, right? Even if you do not – that is not going to be a problem. We can clearly elaborate on how it works and how a new fund offer comes to play when we speak about AMCs. This article will be covering everything you need to know about an NFO – so you will be clear on how it works and whether you should be investing in one.

How Does an AMC Work?

Asset management companies pool funds from different people and invest them in securities. The company invests these funds in capital assets like stocks, real estate, bonds, and much more. An AMC has professionals who are called fund managers that manage the investment, and the research team chooses the right securities.

Fund managers lookout for investment options that are in line with objectives to protect the investment and earn a steady return. An equity fund would mainly focus on investing in shares of companies to maximize returns for the investors.

Now – have you ever sat back and thought about how these companies buy the securities in the first place? No more wondering for you. Now, let us get talking about the new fund offer.

What is a New Fund Offer?

A new fund offer is the first subscription offering for a new fund offered by an investment company. An NFO happens when a fund is launched, and it lets the firm raise capital to buy the security. Mutual funds are one of the most familiar new fund offerings that are marketed by AMCs. The initial purchasing offer for a new fund differs by the structure of the fund.

A New Fund Offer is quite similar to an Initial Public Offering, and both of them represent the attempts to raise capital for further operations. New Fund Offers could be accompanied by aggressive marketing campaigns that are made to entice the investor to buy units from the fund.

They would also often have the potential for significant gains after beginning to trade publicly.

Did you know that there were different kinds of NFOs? Here we will speak about it.

What are the Different Types of New Fund Offers?

1) Open-End Fund

An open-end fund would announce the new shares for purchase on a specific launch day in a new fund offer. The number of shares in this type of NFO is not limited. On their initial launch date and subsequently, these funds can be acquired and sold through a brokerage firm. The fund firm or the fund company affiliates administer the shares, which do not trade on an exchange. After the market closes, open-end mutual funds report their net asset values.

2) Closed-End Fund

As closed-end funds would only issue a certain number of shares during their new fund offer, they are generally among the most heavily marketed new fund issuances. Closed-end funds trade on a stock exchange and receive daily price quotes. Closed-end funds could be bought through a brokerage firm on their initial public offering date.

3) Exchange Traded Fund

A new fund offer also introduces new exchange-traded funds (ETFs). A publicly traded exchange-traded fund is a sort of investment vehicle that can be bought and sold on the stock market.

Allotment Procedure of an NFO

When a new scheme’s NFO period ends, the mutual fund company allots the new scheme’s units within five days. If you don’t acquire an allotment, say due to insufficient know-your-client (KYC) requirements or application form errors, the fund house will reimburse your application fee.

However, if the mutual fund plan is open-ended, you can buy units even after the NFO. Open-ended mutual fund schemes are ones that allow investors to join and leave at any time.

However, not all mutual fund schemes allow you to buy units after the first public offering (IPO).

Close-ended funds are a form of mutual fund that allows you to buy units only during the NFO. Investors cannot enter or exit closed-ended mutual fund schemes at any time. As a result, such schemes can only be invested during the NFO period.

Fund houses are not allowed to go beyond with new fund offers, according to SEBI regulations. In each category, a Mutual Fund business can only have one scheme. This means that a fund house can only start a new scheme if it does not already have one in the mutual fund category. If ABC Mutual Fund Company already has a Large Cap Fund in its product portfolio, it will be unable to introduce another Large Cap Fund.

There are some things that you cannot forget while investing in an NFO.

Things to Remember Before you Kick-Start your Investment in an NFO

It is recommended that you consider the following factors while investing in a New Fund Offer:

  • Asset allocation, risk exposure, expected returns, and other factors should all be examined before investing in an NFO.
  • NFOs are issued for new funds that do not have a track record, which might add to the amount of uncertainty.
  • Keep an eye on the fund house’s history. It is critical to ensure that the fund house in which you are investing has a long track record of mutual fund investments.
  • It is impossible to track the performance of NFOs since they lack a performance history. However, you must be sensible enough to consider the returns when investing. Keep an ideal value for expected returns in mind when analyzing your investment.
  • The offer document and the investment method that the fund manager will use must be carefully read. It is crucial that you know what your fund management intends to do with your money.

Conclusion

Don’t forget to keep the last few tips in mind before you start investing in an NFO. Make sure you know every little detail; this will not just help you make informed decisions, but it will also drive you to a better tomorrow for your investments.

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