What is an NFO?

Every mutual fund starts its life as an NFO aka new fund offer. Just like how a stock debuts by raising money through an IPO, a new mutual fund scheme raises money at its launch via a new fund offer (NFO). 

In simple words, an asset management company (AMC) opens a NFO when it launches a new fund and raises money to buy securities of the fund on behalf of the investors. 

Types of New Fund Offers

An AMC can offer a new fund offer for:

1. Open-ended schemes: You can invest in a NFO of an open-ended scheme during its subscription period, but unlike closed-ended funds, such schemes do not limit their number of units. These funds can be bought and sold on their initial launch date and thereafter.
2. Closed-ended schemes: You can invest in closed-ended funds only through NFOs. Once the NFO closes, the mutual fund scheme is not open for further investments 
3. Exchange traded funds (ETFs): A new ETF is also first offered through a NFO 

Pros and Cons of a New Fund Offer (NFO) 

Investing in a new mutual fund can be a good way to diversify your portfolio but you need to weigh in the risks and benefits before diving in a new trend. Most NFOs are launched when the markets are in a bull run, and its exactly the reason why investors should be way of investing their money into a new fund without a proven track record. Here are few pros and cons to consider before making a decision: 

Pros: 

• Excitement and Potential: New funds can offer access to emerging sectors of the economy or themes with good future potential. 
• Diversification: They can help diversify your portfolio with new investment options. 

Cons: 

• No Track Record: Just like a new restaurant, a new fund has no history to judge its performance. It can be a gamble. If existing funds are available with same investment theme, it may be a better idea to invest in one with a proven track record.
• Higher Costs: NFOs often come with higher expense ratios. That's a reason why many advisors are keen on pushing these funds to investors. Beware!
• Market Timing: Often new fund offers (NFO) are launched when the market is hot, and investors are greedy. But this doesn't guarantee future success. 

NFOs can offer a good way to invest into themes that was not covered before and can be a good opportunity. However, sometimes they're just launched to cash on the investor frenzy in a booming market. This can make them a risky investment proposition since these funds have no established track record. However, most closed-ended schemes are only available for investment during their NFO period, and it could be a good idea to invest in such NFOs if the scheme offers an attractive investment opportunity.

So before investing in a NFO, evaluate the scheme objective and if its offering an unique investment opportunity, check the track record of the fund house and its investment process to make a clear investment decision.