How NFO Work? What is NFO in Mutual Fund? | NFO vs IPO | FAQs

How NFO Work

In this article we will be covering NFO and How NFO work?, then what are we waiting for let’s get into it.

What is NFO in Mutual Fund?

NFO is the introductory offer by an asset management company for the first-time subscription to the newly launched scheme.
Alternatively, NFO in mutual funds collect money from investors and allocate it to a group of securities depending on the prospectus’s scope

At the time of launch, AMC does not disclose the portfolio of securities in which investor’s money will be invested. As per SEBI regulations, once NFO closes, AMC is supposed to disclose the portfolio details to their registered investors within 10days from the close of the month in which the NFO period was closed.

From the investor’s point of view, the asset management companies allow you to buy units of the scheme as the first subscribers of the scheme.
To build the scheme’s AUM(assets under management) just before it purchases securities in the market as per its stated strategy. The units are usually sold at a NAV of Rs 10 during the NFO period.

As many of us would be wondering How NFO work? and let’s understand this process step by step:

Also Read Pros and Cons of Investing in NFO – Is It Good to Invest in New Mutual Funds?

How NFO Work?


From AMC Aspect

  1. As per SEBI, in order to launch any NFO, AMC is supposed to file a draft of the SID(Scheme Information document) along with the legal requirements  connected with the launching of NFO, they have to fulfils as per the directions of govt. of India.
  2. Post which AMC marketing team create a buzz in the market about new fund offer which AMC planning to launch for creating awareness among the investors via different channels.
  3. Followed by publishing their NFO document in daily newspaper with Key details of the scheme likewise scheme objective, NFO period details, Unit price, fund managers, asset allocation pattern etc.

Also Read What is the Difference between Record Date and Ex-Dividend Date? | Do Share Prices Drop after Dividend in India?

From Investors Perspective

  1. During NFO period, investors are allowed to purchase units of the scheme at their face value, which is usually Rs. 10 per unit. However, this offer is applicable for a limited time frame, say fifteen days or a month.
    As we know, NFOs are restricted to a limited time frame, units are allotted to investors in the order of their application.
  2. In order to apply for NFO, investors must complete their KYC (know your customer form) online if this is the first time that you are investing in mutual funds. NFOs do have a minimum subscription amount ranging from Rs. 500 to multiples of 500 thereafter. Once the KYC is completed, investors can then invest an amount equal or higher than the minimum subscription.
  3. Once the NFO periods closes, if the AMC manages to collect minimum subscription amount of stated capital then only proceed with unit allocation or else will refund the entire collected amount to the applicants.
  4. Generally there is no limit on the maximum subscription amount. As a result, units get allotted to invested as per their order of application. Let’s says an investor has applied for Rs. 5000 at a unit price of Rs.10 then he will be allotted 500 units.
  5. Once this period gets overs, prospective investors shall buy only at the prevailing NAV.

Also Read What is a Rights Issue of Shares? | Rights and Bonus Issue | Example | Eligibility | Types

Hope we manage to explain the process in the simplest possible manner.

Type of NFO

In general, NFO is of two types lets discuss these types in detail below:

Closed-Ended Funds: As the name suggests, it’s a close-ended fund means have a fixed number of units to offer during the offer release. In addition to that, entry and exit are not allowed after the NFO period closes. Usually, the time period is 3-4 years from the launch date. However, investors can sell or buy a mutual fund through market exchange.

It does offer benefits such as an extended time frame which would average out the ups downs of the market and result in better results. It saves investors from bad investment behavior.
Therefore, It allows fund managers to manage the portfolio more efficiently by selecting rights stocks and keep a track of the performance.

Open-Ended Funds: Open-ended funds refer to a fund that gets launched after the NFO ends. It offers flexibility to investors that they can enter or exit the fund at any time after the launch. There is no limit on the number of units that the fund can issue.
Hence, investors can subscribe to the NFO even before its NAV is determined, Thus help investors to gain profit in the long run and can make sound decisions while investing in MFs basis the track records of the NAV.

It is up to the investors to choose either an open-ended mutual fund NFO or a close-ended mutual fund NFO.
Both the funds are certainly going to generate capital gains and dividend returns based on the type of investment scheme in which they have put in their money.
Generally, open-ended funds are actively managed by the fund manager. On the other hand, close-ended funds are passively managed funds.

What is difference between IPO and NFO?


Many a time investors get confused with IPO & NFO. Let’s understand the differences to get clarity about both terms. IPO is the initial offer made by the company to the public to raise capital in terms of shares. Whereas, NFO is the first offer of units by an AMC before launching the mutual fund scheme. Hence, we are going to compare both terms on basic parameters:

Offering Price

Pricing is a critical parameter as it is based on the company’s image on the basis of the company’s fundamentals.
The price at which shares get offers helps investors determine whether it is offered at a discount or premium for its valuations.
In an IPO investors value share if offered on discount.
Whereas, in NFO, the units offered are at face value hence these units do not show the actual value of the investment.

Also Read What is Bonus Share? | Record & Ex-Bonus Date | Bonus vs Rights

Performance of Company


While investing in an IPO, investors know the company’s fundamentals as it has already been operational for a long time. Hence can evaluate its strength, weakness, potential to grow basis future prospects of the company.
On the other hand, while investing in NFO,
Investors cannot check its track records as the first time AMC is launching the scheme.
But still, investors want to make the best of NFO then they can study the fund managers’ performance and their returns of other schemes they were managing to understand whether it’s worth investing or not.


The valuation of a company entirely depends on the performance, the company’s future prospects, and more.
Whereas in NFO, the total fund amount is split and invested in the form of units.

Also Read Types of Investors in IPO – What is the difference between RII, NII, QIB & Anchor Investors?

Listing on exchange


IPO gets listed on the stock exchange on cut-off price. Hence, if the price goes up on a listing day, investors can easily make a good profit. In NFO, the fund is collected at the start, and then it gets invested based on the Net Asset Value (NAV), which can be below or above the face value.


The risk involved in IPO is an internal risk that can be overcome once listed on the stock exchange. Whereas in NPO, the risk appetite is generally medium to low and considered fair for all the investors.

Also Read What is OFS in Share Market? | How can I Invest in an Offer for Sale?

NFO Work Related FAQs

Is it good to invest in NFO?

It’s a good opportunity to invest in NFO as the units are way cheaper than the existing nav of a similar scheme. But investing in NFO you read the NFO document carefully.

Can we sell NFO?

Yes, you can sell as an investor. In a closed-ended fund, you can only sell via market exchange. Whereas for the open-ended fund, you can sell at any point of time at the current NAV.

What is an NFO period?

This is the period during which a new Scheme sells its Units to the investors.

Can I do SIP in NFO?

Yes, as an investor you can opt for a sip in the open-ended fund.

Is there any listing gain in NFO?

Yes, we can earn listing gains in NFO post its closure depending upon the commanding the NAV of the units based on the securities in the portfolio.

Can we buy NFO in Zerodha?

Yes, we can buy NFO in Zerodha, please refer to our other article.

Is NFO allotted to everyone?

Yes for open-ended NFO, everyone is allotted with the applied units. However same is not possible for closed-ended funds as they issue a limited number of units for a limited time framework.

NFO work NFO work

Also Read What is SME IPO? | SME IPO Vs Regular IPO | How to Invest in SME IPO? | Sell SME IPO Shares |