A new fund offer, or NFO, occurs when an investment company offers investors the chance to buy shares of a new fund, such as a mutual fund. It is similar to an initial public offering (IPO) which lets a person invest money in a brand new company by buying shares of the company’s stock.
Here’s how a new fund offering works and what it means for you as an individual investor.
Definition and Examples of New Fund Offer
A new fund offer (NFO) occurs when a new fund is offered through an investment company as a way to raise money from public investors. An NFO only lasts for a set period of time, and you must buy a set amount of units to participate in one. The price is set by the investment or asset management company offering the new fund.
- Alternate name: New fund offering
- Acronym: NFO
You might see a new fund offer for mutual funds, including open-end and closed-end funds, or with exchange-traded funds (ETFs).
How a New Fund Offer Works
An NFO works in a couple of different ways, depending on the type of fund.
When a new fund is created, it goes to an investment or asset management company to launch. Some new funds have more marketing and buzz compared to others, depending on the fund. As a potential investor of the new fund, you’ll get to see the kind of securities in the fund, the fund manager, and any company information you may need.
Each type of fund works slightly differently when it comes to an NFO:
- Open-end fund: These types of NFOs don’t limit the number of shares you can buy. They aren’t traded on an exchange. You buy or sell the shares on launch day—or any time after—through a brokerage firm or online trading account. You’ll see net asset values (NAV) every day after the market closes.
- Closed-end fund: These funds limit the number of shares you can buy during a new fund offering. Closed-end funds trade on an exchange, and you’ll get daily price quotes all day. You’ll purchase closed-end funds on launch day through an online trading account or a brokerage firm.
- Exchange-traded fund: ETFs can be publicly traded on the stock market but also go through a new fund offering first.
NFO vs. IPO
A new fund offer is a lot like an initial public offering (IPO). They are a lot alike but a few features show how they operate differently. Both come with pros and cons:
|New Fund Offer (NFO)||Initial Public Offering (IPO)|
|Price set by investment or asset management company||Price set by issuing company|
|Your money goes to the asset management company handling the fund||Your money goes to the issuing company|
|Purchased one time and redeemed when required||Bought and sold through a stock exchange|
Pros and Cons of New Fund Offerings
Diversification for your portfolio
Funds may be safer investments than stocks
Minimum subscription offer
New funds may come with higher risk compared to existing funds
Investing in the investment company, not the individual fund
Diversification for Your Portfolio
Investing in many different securities and funds may help lower your overall investment risk. Putting your money into a new fund offering gives you the chance to diversify your investments even more.
Funds May Be Safer Investments Than Stocks
Stocks are one of the riskiest investments, even though, historically, they have shown to yield higher returns. Investing in a fund may be a better option for investors who don’t want to take that big of a risk.
Minimum Subscription Offer
Buying an NFO means you’re putting money into a minimum subscription offer. This means you have to buy a specific number of units (like shares) to participate in the NFO. You may need to put more money in than you would compared to buying a traditional stock or another type of security.
New Funds May Come With Higher Risk Compared to Existing Funds
While funds are often seen as less risky compared to stocks, a new fund offer is still new. That means there’s no existing track record of how the fund has historically performed because it hasn’t existed yet.
Be sure to look at the expense ratio of the new fund. Since it’s new, it could end up being higher than an existing fund, meaning it could cost you more.
Investing in the Investment Company, Not the Individual Fund
When you put money into an NFO, you’re giving it to the asset management company. If you haven’t done your due diligence and checked out the company before handing over your money, you may not know what to expect. It’s important to research the company to evaluate its profitability.
How to Find New Fund Offers
You can find new fund offers to invest in by scanning investment or asset management companies’ websites. NFOs will likely 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 brokerage.
- New fund offers (NFOs) let investors buy shares of open-end or closed-end mutual funds or even ETFs that are brand new.
- NFOs are offered through investment or asset management companies, and you’ll need to buy a minimum subscription offer (a set amount of units) to participate.
- NFOs aren’t traded on a stock exchange like initial public offerings, even though the two are similar. NFOs are purchased once.
- There are more limitations to NFOs compared to other types of securities. You should only invest in one if it offers more diversity in your portfolio and you expect a low level of risk.