What is the difference between an NFO and a Mutual fund?
An NFO (New Fund Offer) and a mutual fund are related concepts in the world of investing, but they are not the same. Here are the key differences between the two:
Definition:
NFO (New Fund Offer): An NFO is the initial offering of units of a mutual fund scheme to the public. It is the process through which a new mutual fund scheme is launched in the market. Investors can subscribe to the units of the new scheme during the NFO period.
Mutual Fund: A mutual fund is an investment vehicle that pools money from multiple investors and invests it in a diversified portfolio of stocks, bonds, or other securities. Mutual funds are established entities that manage the pooled funds on an ongoing basis.
Timing:
NFO: An NFO is a one-time event that marks the launch of a new mutual fund scheme. It has a specific start and end date, during which investors can buy units of the scheme at the initial offer price.
Mutual Fund: Mutual funds are ongoing investment vehicles. Once a mutual fund is established through its NFO, it continues to operate indefinitely, and investors can buy or sell units of the fund on any business day at the prevailing Net Asset Value (NAV).
Portfolio Composition:
NFO: During an NFO, the mutual fund scheme has not yet invested in any securities. Investors are essentially buying into the scheme before it starts investing. The portfolio composition and asset allocation of the scheme are often outlined in the scheme's offer document.
Mutual Fund: A mutual fund that has been in operation for some time has a well-defined portfolio. The fund manager actively manages the portfolio by buying and selling securities based on the fund's investment objectives and strategy.
Price Determination:
NFO: In an NFO, units are typically sold at a fixed price, often referred to as the "initial offer price" or "NAV at par." This price is usually set at a standard value (e.g., Rs. 10 per unit in the case of Indian mutual funds) during the NFO period.
Mutual Fund: In a mutual fund, the price at which units are bought or sold is determined by the Net Asset Value (NAV) of the fund, which is calculated at the end of each business day based on the current market value of the fund's assets.
Investment Objective:
NFO: The investment objective and strategy of an NFO are outlined in the scheme's offer document, and investors subscribe to the scheme based on this information.
Mutual Fund: Established mutual funds have a track record of their performance and investment strategy, which can help investors assess whether the fund aligns with their financial goals.
In summary, an NFO is the initial offering of units of a mutual fund scheme, while a mutual fund is an established investment vehicle with an ongoing portfolio. When considering investing in an NFO, investors are essentially buying units of a scheme before it begins investing, whereas in a mutual fund, they are buying units of a fund with an existing portfolio.
