New Fund Offers (NFOs) and Initial Public Offerings (IPOs) are two terms commonly encountered in the financial markets. At first glance, the two investment avenues share a similarity — they are both first issues of assets and investment units to the public. However, when you take a closer look, you will find many differences between an NFO and an IPO.
In this article, we will decode the meaning of an NFO and an IPO and then explore the various IPO and NFO differences.
What is an IPO?
An IPO is the process through which an unlisted company offers its shares to the public for the first time. By announcing an IPO and issuing its shares to the public, an unlisted company becomes a publicly listed enterprise. The offer is made in the primary market, and once the IPO closes, the company’s shares are listed on the stock exchanges in the secondary market.
A company may choose to announce an IPO and raise additional capital for any of the following reasons:
- Business growth and expansion
- Launching a new product line
- Paying off its existing debts
- Meeting its working capital requirements
- Liquidating existing investors’ holdings
As an investor, you can apply for the shares of a company issued through an IPO. If you are allotted shares in the company, you can sell them after they are listed on the exchange. This helps you capitalise on the listing gains, if any. Alternatively, you can hold the shares over the long term to benefit from potential capital appreciation in the long run.
What is an NFO?
A New Fund Offer (NFO) is the process through which a new mutual fund scheme is launched in the financial market by an Asset Management Company (AMC). Investors who apply for the NFO can purchase the mutual fund units at a price fixed by the AMC. The funds raised from these investors are then pooled together and used to buy different assets. Depending on the type of mutual fund scheme, the assets may be stocks, bonds, money market instruments, or units of REITs or InvITs.
Once the NFO period closes, the net asset value (NAV) of the mutual fund units fluctuates based on the changing prices of the assets in its portfolio. You can purchase more units or redeem your holdings at the prevailing NAV if it is an open-ended fund.
Differences between NFO and IPO
Having understood the meaning of a New Fund Offer and an Initial Public Offering, you can now better appreciate the differences between NFO and IPO. The key NFO and IPO differences are summarised in the table below.
| Particulars | New Fund Offer (NFO) | Initial Public Offering (IPO) |
| Meaning | NFO, or New Fund Offer, is how an Asset Management Company (AMC) launches a new mutual fund program to the market |
A company becomes public by selling its shares to the public and getting listed on a stock exchange through an Initial Public Offering (IPO) |
| Nature | NFO is for a new mutual fund program |
IPO is for a new stock |
| Objective | To introduce a new investment vehicle | To raise capital for the company |
| Issuing Entity | An Asset Management Company (AMC) | An unlisted company that intends to be listed |
| Fundamental Unit | Units of the mutual fund scheme | Equity shares in the company |
| Price Determination | Typically offered at a fixed price (usually Rs. 10 in India) | Determined by the demand and supply dynamics in the market through book building or a fixed price method |
| Investment Opportunities Available for the Investor | Option to invest in debt, equity, money market instruments and more, depending on the type of mutual fund scheme | Option to invest directly in the company’s shares |
| Utilisation of Capital | To purchase assets for the mutual fund’s portfolio | To fund the company’s expansion, product launches, or debt repayment process |
| Post-Listing Trading/ Investment Opportunities | Units in open-ended funds are available for purchase at the prevailing NAV | Shares of the company are available for purchase on the stock exchanges |
| Demat Account Requirement | Not mandatory | Mandatory |
| Risk | Depends on the assets in the mutual fund’s portfolio | Generally high |
| Returns | Depends on the assets in the mutual fund’s portfolio | Potential to offer significant returns over the long term |
| Diversification | More diversified | More concentrated |
What are the similarities between NFO and IPO?
NFO (New Fund Offer) and IPO (Initial Public Offering) share certain similarities:
- Fundraising: Both NFO and IPO are methods of raising capital. While IPOs are used by companies to raise funds by selling shares to the public, NFOs are used by mutual funds to gather money from investors.
- Investor participation: Both allow investors to participate in the financial markets. IPOs provide individuals with an opportunity to invest in company stocks, while NFOs enable investment in mutual fund schemes.
- Market Entry: Both involve the entry of new securities into the market. IPOs introduce a company's shares to stock exchanges, while NFOs introduce new mutual fund schemes to potential investors.
- Regulation: Both NFOs and IPOs are regulated by the respective authorities in their domains. IPOs are overseen by stock market regulators like SEBI in India, and NFOs are regulated by the mutual fund industry regulators.
Despite these similarities, it's essential to recognize their fundamental differences, such as the type of securities involved (stocks vs. mutual fund units) and the investment objectives (ownership in a company vs. participation in a managed fund).
Conclusion
Now that you know the main differences between an NFO and an IPO, you can make a more informed decision about which investment avenue to choose. Despite their differences, both NFOs and IPOs are excellent investment options.
If you have a high tolerance level for risk and want to earn inflation-beating returns, IPOs from fundamentally strong companies may be a suitable option. However, if you prefer a more passive investment strategy and greater diversification, you can opt for NFOs from debt, equity, or even hybrid funds.
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