IPO vs NFO: Here’s All That You Need to Know

Investments

IPO vs NFO: Here’s All That You Need to Know

By Jupiter Team · · 7 min read

The IPO boom took over Indian markets in 2021. Its effects are still evident, with major companies like LIC, Ola, Bajaj Energy, and Delhivery expected to issue IPOs in 2022. However, the initial enthusiasm has been replaced by wariness amongst consumers, with the stock prices of companies such as One97 Communication (the parent company of Paytm) and Nykaa falling after their initial launch.

Therefore, investors have been seeking other opportunities that allow them to make investments at the entry-level itself. NFOs have emerged as exciting alternatives, but there is immense confusion about their offer. We are here to clarify these matters for you and help you make smarter investment decisions!

If you have ever wondered what an IPO stock or IPO investment is, this article should help you understand an Initial Public Offering (IPO) and how it differs from a New Fund Offering.

What is an Initial Public Offering?

While Initial Public Offerings have been a significant trend in the market for the past year, there is still a limited understanding. IPO is a process undertaken by a company to raise funds for its business to grow further. Once these IPOs enter the market, they are traded on the stock exchange in India. IPOs fundamentally change the structure of any organisation as it transitions from being private to publicly owned, thus influencing all significant decisions ahead.

IPOs are an excellent opportunity for investors to become parts of companies with immense potential value. If you seek short-term profits and immediate gratification, you may choose to sell your IPO as soon as it starts trading in the market if it has made a splash upon opening. In contrast, if you genuinely believe in a company's potential, you may hold on to your investment so that as the company’s value grows over time, so does your stock.

Do you believe that a company will show promising growth immediately upon entering the market? Then applying for an IPO might be the right option. Do you think the company may have a sluggish start but is a worthy option in the long run? IPOs may be your solution.

What is a New Fund Offering?

One can easily get confused between IPOs and NFOs. An easy way to distinguish them is that while Private companies introduce iPOs, NFOs stand for New Fund Offerings issued by Asset Management Companies to launch new schemes.

These NFOs are essentially the launch of new mutual fund schemes, and the money gathered through the NFO is used to buy securities like bonds and equity. Once the initial issue is completed, investors can opt to purchase fund units at the current Net Asset Value (NAV). Moreover, people who opted for the NFOs enjoy promising gains upon the mutual fund being listed in the market.

How do IPOs and NFOs function?

IPOs and NFOs have a few key differences that dictate how they function. The purpose of each investment option is different. Companies usually opt for IPOs to get the funds to grow further. AMCs launch an NFO to provide a new mutual fund investment option. It raises funds needed to acquire securities and launch the mutual fund into the market.

Difference Between IPOs and NFOs

Diving deeper into the dissimilarities between IPOs and NFOs can help you understand what might be the wiser investment option for you. While both allow you to make investments at the inception stage, their immediate and long-term impact, crucial factors, and probability of returns differ. Here is a quick guide to help you differentiate between the two.

Understanding Terminologies Such as Mutual Fund Units and NFO Periods

While this may not directly impact your investments, it is crucial to know the terminologies used in NFOs and IPOs. A single unit of an IPO is popularly known as a share. The number of shares you get determines a mix of the multiples set by the company and each share’s price.

The single unit in your mutual fund is called a fund unit. You can decide on the number of fund units to apply for, and they shall all be invested purely in the assets considered best suited by the fund house. Similarly, an NFO period is the number of days available to apply for an NFO. This usually differs between equity and debt funds.

Risk Assessment

With IPOs, the actual value of your investment will be determined once it enters the market. Once exposed to the stock market, you have no control over how your stocks will be valued. Therefore, you need to study the company’s history, the eagerness in the market for the shares, and the expected behaviour of the stock.

With NFOs, you will not know the exact assets your funds will be allocated to or have a performance history of that particular mutual fund. Therefore, it will become critical for you to understand the fund house’s reputation, the fund’s objective, and the theme that this particular NFO may be targeting.

Initial Offering

IPOs, even though not in the market yet, can only be applied for through established stock exchanges. This ensures fairness in the allocation and distribution and connects to the rest of your stock portfolio. NFOs are available for the public on the fund houses’ websites and can be applied directly.

Pricing

The price of the IPO is determined by the issuing company itself, depending on the attractiveness of the valuation and the organisation’s fundamentals. NFOs are usually priced at a face value of INR 10. Therefore, IPO prices are dictated by the issuing company itself, whereas NFOs are generally kept at the same price, irrespective of the fund house involved.

Listing Price

Upon the completion of the IPO period, the price of the shares at which they will be listed and traded on the stock market will be determined by the assessment of other traders and the perception of the company’s promise.

When it comes to NFOs, the Net Asset Value of the scheme is dictated by the value of the securities currently present in the portfolio.

NFO vs IPO: Which Is the Better Investment Option?

Your goals and the market conditions decide the better investment. When it comes to immediate returns, an IPO might be wiser if there is immense excitement in the market and it has already been oversubscribed many times over. NFOs often provide promising returns, but it depends on the assets present in the mutual fund scheme at the end of the day.

So, if you see tremendous excitement over an IPO, you might want to look at the buzz and understand if it is all conjecture or if there is real potential. Similarly, if you wish to stay invested in a company in the long run, a slight dip at the beginning will not affect the long-term growth of your chosen stock.

NFOs are an excellent option for you if you wish to invest in mutual funds but want a cheaper option than the ones in the market. The returns on your investments will be uncertain, and you must understand the risks involved and the fund’s objectives. NFOs may also come with lock-in periods, while stocks can be traded on the market.

Things to Keep in Mind Before Investing in IPOs

The Company’s Business Model and Focus

Before you invest in an IPO, have a clear understanding of the company’s business model and its revenue generation strategy. This is the essential information and will provide you with knowledge of the company’s stability, its liquidity situation, and position in the industry.

Market Share and Growth Metrics

In a market growing as aggressively as India, it is important to identify companies that offer a strong growth trajectory ahead. It would also be helpful to subscribe to IPOs that value the company issue richly.

Volume of Application

IPOs are considered a reliable investment option and have gained immense popularity. Oversubscriptions are bound to happen in such a case, reflecting the eagerness for the shares and the probability of you securing an allotment.

Things to Consider Before Investing in NFOs

History of the Fund House

Before investing in an NFO, you must check the history and reputation of the fund house launching it. Develop an understanding of the fund house’s past performance in numerous markets, specifically in comparison to its peers. Above all, it adheres to the scheme’s mandate and follows prudent investment processes.

Fund Objectives

NFOs are launched alongside necessary paperwork such as the Scheme Information Document (SID), product presentation, etc. These papers explain the fund’s goals, planned assets to be allocated, and investment strategy.

These documents will help you understand the investment process and how the fund managers will handle the invested amount. Remember, the mutual fund’s goals must align with yours for truly fruitful returns.

Cost of Investment

While most NFOs do not have additional entry charges, you may be charged an additional amount if you wish to withdraw your investment. Make sure you are well aware of such exit load fees and their application period before investing.

You may also be charged an expense ratio on your investments. Ensure that the fund of your choice has a lower expense ratio, thus providing you with higher returns.

What are Mutual Funds Units?

What is the NFO Period in Mutual Funds?

IPO or NFO: Which Way Will You Go?

Now that you have all the information you need, your next step is to dive into finance and up your investment game. With a host of exciting IPOs and NFOs on the horizon, get your research hats on, start analysing, and make those strategic investment moves soon! The market awaits.

FAQs

What Is an IPO in the Share Market?

An IPO helps companies transition from being privately owned to publicly owned entities and helps them raise funds and grow further. An IPO offers you the opportunity to make an initial bid for the shares before the company enters the market.

What are NFOs?

A New Fund Offer (NFO) is a first-time subscription offered for a new scheme launched by an Asset Management Company (AMC). The money raised through an NFO helps AMCs invest in the securities they require for this new scheme.

What Is the difference between an IPO and an NFO?

An IPO allows you to own shares of a company before it enters the market. Once launched, the stock price is subject to fluctuations in the market. An NFO allows you to begin investing in a mutual fund without paying the current mutual fund rates. However, there is limited knowledge of the kind of assets your chosen NFO will invest in.

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