Introduction
Initial Public Offering and New Fund Offer are both the first issue of parts of ownership to public investors. An IPO is the initial offer of equity shares made by a company to the retail investors – after which the company gets listed on the stock market for public trading. An NFO, meanwhile, is an initial offer of units of a new mutual fund scheme being launched by an investment firm. In this blog, we deep dive into what these are and the differences between the two.
What is an IPO?
An IPO is an Initial Public Offering. Companies launch an IPO when they decide to foray into the stock market by selling a part of ownership to the public. The company thereafter gets listed on the stock exchange for the trading of shares. This decision of going public could be for various reasons, for example :
1. To raise capital for the company’s business expansion or working capital for day-to-day functioning.
2. To pay off or minimize debts of the company.
3. To allow initial investors to liquidate their holding, etc.
When a company decides to go public, the power to transform the company from private to public is vested with an investment bank. The investment bank evaluates the company, and a price band is fixed for the issue of the shares depending on the valuation of the company. The company which offers its shares is called the ‘issuer’. The details of the proposed offering are disclosed to the public via a document known as ‘prospectus’. Some IPOs offer a discount to retail investors that is unavailable to institutional investors or HNIs, which gives the public motivation to buy the stock. Once the IPO window closes, the shares are listed on the stock market and thereafter opened for trading on the market.
An IPO, in essence, is the launch of a company in the stock market.
What is an NFO?
NFO stands for New Fund Offer. An NFO is the launch of a new mutual fund scheme by an investment company to invite pooling of capital from investors. This capital raised would then be used by the mutual fund company to invest in securities such as equities, bonds, and other assets, with a goal of generating returns for the investors. The process of issue of NFO is handled by the Asset Management Company (AMC) itself and not a third-party investment bank. AMCs offer NFOs for a specific time period at a certain price, just like IPOs, and investors can subscribe to them.
Once the tenure expires, the NFO is closed, and the scheme is ‘listed’. The mutual fund scheme is now open for everyday trade on the market. The prevailing value of the fund units at the end of each trading day is the Net Asset Value (NAV) of the mutual fund, and that is the price per unit or market price that is available to the investors thereafter.
An NFO is the launch of a product of a mutual fund company for the public.
Differences between NFO and IPO
| Parameters | IPO | NFO |
| Definition | The first offering of a company to the public in the form of shares. | A launch of a mutual fund scheme through offering the first units of the mutual fund to the public. |
| Purpose | Mainly to raise funds to meet the various capital needs of the company | Mainly to launch a new mutual fund investment product in the market |
| Functional unit | Shares | Fund Units |
| Debut | Of a company at the market | Of a mutual fund scheme (product of a company) |
| Valuation | The valuation of a company is done by an investment bank who then decides the price band for the IPO. The attractiveness of the IPO stems from the growth potential exhibited by the company | Valuation is irrelevant because the AMC sets the price for the NFO and the attractiveness comes from the features of the scheme. |
| Pricing | The listing price of the shares is determined by the demand and supply, and the amount of investments the offer attracts. | The fund units are generally fixed at Rs 10 for the NFO. The Net Asset Value or NAV changes on a per-day basis depending on demand and supply. |
Key takeaways
There are certain things to keep in mind before investing in an IPO or NFO. Both IPO and NFO can help investors make gains but it is very important to do your research before making the investment. If it is an IPO :
- Research about the company’s performance so far in the market.
- Study the valuation analysis of the company by the investment banks.
- Go through the prospectus carefully.
- Familiarise yourself with the risks associated.
If it is NFO :
- Research about the fund manager of the mutual fund scheme.
- Research about the features of the scheme such as risk profile, lock-in period, expense ratio etc.
- Familiarise yourself with the risks associated.
Last but not least, practice patience and prudence while investing and do your research well.
Happy investing!
