In the financial market, there are two phrases that are frequently used and more often misunderstood – New Fund Offers (NFO) and Initial Public Offerings (IPO). On the surface, both NFOs and IPOs appear similar because they are both “first issues” ; however, their purpose, risk, and benefits are totally different in practice!
What is an IPO?
An Initial Public Offering (IPO) is when a privately held company publicly sells shares for the first time. After it is listed, the shares can be bought or sold on a stock exchange.
Why do companies launch IPOs?
- To raise capital for growth or new initiatives
- To provide cash for working capital needs
- To provide an exit for early investors
For investors, an IPO allows them to become a shareholder in the company. If the company grows, the investor may benefit from increased share prices and any dividends received.
What is an NFO?
A New Fund Offer (NFO) is the launch of a new mutual fund scheme by an Asset Management Company (AMC). The amount invested can be converted into units of the fund at a predetermined value (commonly ₹10 per unit), during the offer period.
Why do AMCs launch NFOs?
- Launching new themes or investment styles
- Sector-related or hybrid funds
- To increase options between equity, debt or money market securities
Once launched, the NAV will rise or fall based on how the underlying portfolio performs.
NFO vs IPO: Differences
| Particulars | New Fund Offers (NFO) | Initial Public Offering (IPO) |
| Nature | Launch of a new mutual fund scheme | A public issue of shares for the issuer’s first timeIssuer |
| Issuer | Asset Management Company (AMC) | Company that is going public (unlisted) |
| Investment Unit | Mutual fund units | Equity shares |
| Pricing | Fixed (usually ₹10/unit) | market offer is impacted by demand and supply |
| Risk | Dependent on underlying fund assets | Usually higher for stocks, market linked |
| Returns | Related to NAV movement | Potential for high listing and for long term stock growth |
| Diversification | Portfolio diversified assets | Concentrated in one single Company |
Similarities of NFOs and IPOs
NFOs and IPOs have a few things in common, even though they differ from one another:
- Both raise capital from outside investors.
- Both provide exposure to new investment opportunities.
- Both are subject to regulation from SEBI.
- Both have investor protection features.
NFO vs IPO: Which is Better?
Investors suited for IPO’s:
- Comfortable with high risk and volatility.
- Long-Term Investors believe in company’s growth.
- Traders looking to earn short-term returns.
- Need liquidity (IPO’s can be liquidated on the exchanges).
- Must possess a Demat account.
Investors suited for NFO’s:
- Are happy with diversification and professional fund management’s oversight.
- Medium to long-term investors looking to capture consistent growth.
- Comfortable with moderately high liquidity (turning in fund units takes time before issuing cash).
- Must account for fund management fees and expenses.
- Do not need a Demat account – can invest through mutual fund platforms.
Where to start:
- IPO = Direct ownership in a business with greater growth potential – but greater risk.
- NFO = A diversified portfolio, with managed risk while achieving steady growth. and managed risk.
Conclusion
Both IPOs and NFOs have a role to play in an investor’s portfolio.
- IPOs can create wealth assuming the company performs well.
- NFOs provide diversification, professional management, and much lower costs to enter.
At Equentis Investech we see the way forward smartly, as balance – the wealth creation opportunities of IPOs and the diversification and stability of mutual funds through NFOs.
The important thing is to select an appropriate investment style to your time line, financial goals and risk profile.
