IPO vs NFO
The simplest way of enhancing your wealth is to invest your money into avenues that are profitable and in line with your financial goals and risk appetite. And the two most popular investment avenues for retail investors are direct equities and mutual funds. But in case of both these instruments, a pressing concern is – whether to invest in an existing scheme / publicly traded company or opt for a new fund offer / initial public offer? Before we weigh the pros and cons of NFO and IPO, we first need to understand their meaning and characteristics to judge their suitability.
What is an NFO?
An NFO or New Fund Offer is the first public offering of a mutual fund. Akin to an Initial Public Offer in case of companies, an NFO enables investors to participate in a fund before it opens for subscription to the general public. AMCs usually launch NFOs when they are planning to set up a new scheme to explore a fresh theme or sector. The net asset value (NAV) of an NFO is usually priced at ₹10.
What is an IPO?
An IPO or Initial Public Offer is when a company offers its shares to the general public for the first time. Post an IPO, the shares of the company are available for trading on the stock market. Companies can either launch an IPO through a book building issue or fixed price issue. In a book building issue, investors have to bid within a price band. Whereas in the case of a fixed price issue, the share price is already disclosed to the general public.
Is investing in an NFO a good investment opportunity?
Participating in a new fund offer is an excellent way of subscribing to a new mutual fund. The main reason why NFOs are a good opportunity is that the prices of individual fund units are usually on the lower side. Once the fund gets listed on a stock exchange and the units start getting traded in the open market, the price (or NAV) of each fund unit may rise (or fall). If the fund in question performs well after being listed on a stock exchange, then you will be suitably placed to either sell the units and make a profit or hold the units for the long term. But remember, NFOs do not have a performance track record, so you must exercise due diligence before investing in an NFO.
What are the differences between an IPO and NFO?
IPO vs NFO at a glance
| Parameter | Initial Public Offering | New Fund Offer |
|---|---|---|
| Meaning | An Initial Public Offering is a public invitation to subscribe to the shares of a company. | A New Fund Offer is a public invitation to apply for the units of a new mutual fund scheme. |
| Issuer | An IPO is issued by the company whose shares are being offered to the public as a part of its listing on a stock exchange. | An NFO is launched by a fund house to invite subscription to a new fund before its listing. |
| Underlying asset | The underlying asset in an Initial Public Offering is the shares of a company. | The underlying asset in a New Fund Offer is the units of a new mutual fund scheme. |
| Price | The issue price of each share in an IPO is decided by the company issuing it, with assistance from the designated merchant banker. In the case of a book building issue, a price band is announced instead of a fixed price. | The price of each mutual fund unit in a New Fund Offer is determined by the fund house issuing the NFO. |
Both IPOs and NFOs serve as tools for investors to invest in the instruments before they get listed for general public. However, before investing in an IPO or NFO, you must conduct sufficient research about the company or fund house. In addition to the above, you must ascertain whether the IPO or NFO you wish to invest in aligns with your investment goals, risk horizon, and overall financial planning. You can check out the information on the latest IPOs on the official m.stock website and enjoy a seamless and paperless IPO application process.
Read Also: IPO V/s FPO - Which one to invest in?
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FAQ
Is it good to invest in an NFO?
The decision to invest in a New Fund Offer should be driven by research. You must make the investment decision after ensuring that the offering is in alignment with your risk appetite and investment goals.
What are the disadvantages of an NFO?
The disadvantages of an NFO include the following:
Uncertainty about the performance of the fund after it opens for subscription to the general public
Risk associated with exploring a new theme or sector
Which NFO is best for investment?
There is no such thing as an NFO that is best for investment. The right NFO for you to invest in is the one which aligns with your investment goals and risk appetite.
What is the NFO period?
NFO period is the duration of time for which a New Fund Offer remains open for applications. This period usually lasts 15 to 20 days.