Invested in NFO ? Read how they invest your money

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As we know , equity fund NFO can be kept open for a maximum 15 days. Debt funds, especially fixed maturity plans (FMP) and those investing in very short term fixed income options such as liquid schemes are kept open for a very short period of time, only about three days or lower. Units are allotted within five days after the NFO closes. If you don’t get allotment because of any reason like incomplete know-your-client (KYC) norms or mistakes in application forms, your fund house refunds the application money.

Every NFO must comply with the 20-25 rule. This rule mandates that there be at least 20 investors in the scheme and no single investor account for 25% or more of the money invested in the fund. In fact your scheme has to stick to this 20-25 rule at all times. Because the NFO usually generates substantial funds, it doesn’t invest it all in one go. The fund has about six months to invest the amount. There are situations when the stocks identified by the fund manager may be illiquid or the fund manager may expect a correction in the prices of some stocks. That’s also why typically an equity NFO invests significantly in arbitrage opportunities initially to ensure the 65% threshold investments in equities, to avail equity taxation benefits. 

In general, it is advisable to avoid NFOs, unless it offers you a theme or a strategy that is not available elsewhere in the MF industry. Also, open-ended schemes usually work better than closed-end schemes as the former gives you the flexibility to exit at any time you want. But if you must invest in an NFO, you can either transfer money from your bank account using internet transfer or write a cheque. Investors can park their money in an overnight or liquid fund and switch to a new fund offer during the closure of the NFO. Remember, while switching out investments from liquid funds they attract exit loads for the first six days from the date of allotment of units.

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