The New Fund Offer (NFO) is when an investment company provides an opportunity for investors to purchase shares of a new fund, such as a mutual fund.
Definition and Examples of New Fund Offer
The New Fund Offer (NFO) occurs when a new fund is presented by an investment company to raise money from the public investors. The New Fund Offer lasts for a specified period of time, and you must purchase a specified number of units to participate in it. The price is determined by the investment company or the asset management firm that is offering the new fund.
Alternative name: New Fund Offer
Abbreviation: NFO
Note: You may see New Fund Offers for mutual funds (including open-end and closed-end funds) or exchange-traded funds.
How New Fund Offer Works
The New Fund Offer works differently, depending on the type of fund.
When creating a new fund, it is presented to an investment company or asset management firm for launching. Some new funds gain more marketing and hype compared to others, depending on the fund. As a potential investor in the new fund, you will be able to review the types of securities in the fund, the fund manager, and any information about the company.
Each type of fund operates slightly differently when it comes to the New Fund Offer:
Open-End Fund:
These types of new fund offers do not limit the number of shares you can buy. They are not traded on the stock exchange. You can buy or sell shares on the launch day or any time afterwards through a brokerage firm or an online trading account. You will see the net asset values (NAV) every day after the market closes.
Closed-End Fund:
These funds limit the number of shares you can buy during the New Fund Offer. Closed-end funds are traded on the stock exchange, and you will receive daily price quotes throughout the day. You will purchase closed-end funds on the launch day through an online trading account or brokerage firm.
Exchange-Traded Fund:
Exchange-traded funds can be publicly traded on the stock market and typically go through a New Fund Offer first.
New Fund Offer vs. Initial Public Offering
The New Fund Offer is similar to an Initial Public Offering (IPO), but there are some characteristics that show how they function differently. Both come with advantages and disadvantages:
| New Fund Offer (NFO) | Initial Public Offering (IPO) |
|---|---|
| The price is set by the investment company or asset management | The price is set by the issuing company |
| Fund owners go to the asset management company managing the fund | Fund owners go to the issuing company |
| Purchased once and redeemed when needed | Purchased and sold on the exchange |
Advantages and Disadvantages of New Fund Offers
Advantages:
- Diversification for your portfolio: Investing in multiple securities and funds can help reduce your overall investment risk. Putting your money into a New Fund Offer allows you to further diversify your investments.
- Funds may be safer investments than individual stocks: Stocks are considered one of the riskiest investments, although they have historically shown to yield higher returns. Investing in a fund can be a better option for investors who do not want to take on significant risk.
Disadvantages:
- Minimum subscription offer: When purchasing a New Fund Offer, you are putting money into a minimum subscription offer. This means you must purchase a specific number of units (like shares) to participate in the New Fund Offer, and you will also need to keep the money in the fund until the maturity date. You may need to put in more money compared to buying a traditional share or another type of security.
- New funds may come with higher risks compared to existing funds: Although funds are often considered less risky compared to stocks, a New Fund Offer is still new. This means there is no historical performance record of the fund over the long term.
Note:
Make sure to consider the cost ratio of the new fund. Since it is new, it may be higher than an already existing fund, which means it could cost you more.
How to Find New Fund Offers
You can find new fund offers for investment by scanning the websites of investment or asset management companies. New fund offers are likely to be announced in advance so that investors can decide whether they want to invest and add the fund to their portfolio. You may also be able to invest through your usual broker.
Key Takeaways
- New fund offers (NFOs) allow investors to purchase shares of open-ended or closed-end mutual funds or even entirely new exchange-traded funds.
- New fund offers are made available through investment or asset management companies, and you will need to purchase the minimum subscription offer (a specified number of units) to participate.
- New fund offers are not traded on the stock exchange initially like an initial public offering (IPO), although they are somewhat similar.
- There are more restrictions on new fund offers compared to other types of securities. You should invest in them only if they provide greater diversification in your portfolio and you expect a low level of risk.
Source: https://www.thebalancemoney.com/new-fund-offer-nfo-5187753
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