June 07 , 2012
A New Fund Offer (NFO) is a new mutual fund scheme that is opened for public subscription. Though it sounds similar to its cousin, the Initial Public Offer (IPO) of shares, the two are very different. In an IPO, the value of the shares being offered is discovered in the market - investors bid for what price they are willing to pay. In an NFO, on the other hand, there is no price discovery. After all, the NAV of a mutual fund is simply the sum of the market prices of its shares and has no independent existence.
In general, a new fund offer of mutual fund is something to be avoided. Very rarely does it offer something that is not already available in the market. Moreover, it has no track record by which you can ascertain its soundness and performance. Most of the same funds are open to subscription anytime after the NFO is over too. So if it shows good promise, you can always return to the fund later.
In the past, mutual funds offered high commissions to agents to sell NFOs. As a result, agents recommended NFOs at the expense of older funds with a good track record. Thankfully, the regulator has now put an end to this practice of paying commissions; so you may hear less noise about NFOs from agents going forward.