How Does an NFO vary from an IPO?

What is an NFO?

Similar to an initial public offering (IPO), in which a company allows the public to invest in their operations for the first time, a mutual fund allows the public to invest in their pool for the first time through issuing the new fund offer (NFO). An asset management company (AMC) or fund house accepts public investments when it launches an NFO to purchase capital assets.

The fund houses keep the NFO open only for a certain duration of time, and investors will be purchasing the fund units at the stipulated cost during this period. Generally, the issuing price of NFO would be Rs 10. Once the NFO closes, investors can purchase fund units at the prevailing net asset value (NAV) of the mutual fund scheme. More often than not, investors who invested in an NFO have enjoyed significant post-listing gains.

Is investing in an NFO a good opportunity?

They say several little drops of water form an ocean. The same holds for a mutual fund scheme. When an NFO is launched, the price would most likely be Rs 10. Hence, an NFO would be much affordable as compared to a well-established fund. However, your investment decision should be well informed.

Whether you are investing in an NFO or a well-established fund, you must invest in the fund only after ensuring that your objectives are being served and the fund’s risk levels fall under your risk tolerance. If not, you may not consider investing in an NFO. You have to read the document before investing carefully.

How does an NFO differ from an IPO?

The following table shows the significant differences between subscribing to an NFO and IPO:

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What is an IPO?

Initial Public Offering (IPO) is a process through which a company aims to seek funds from their investors to grow its business. To offer IPO scrips, several companies have to list themselves in the stock exchange of India.

From startup to reputable companies, every company has the right to launch an IPO. Usually, the entire IPO is being written by one or more investment banks on behalf of the company.

IPO has a strong impact on the company's holdings. The company's status changes from a private to publicly owned company in the stock market exchange when the company offers an IPO to all the investors.

IPO's is majorly used for three purposes:.

• To accumulate capital for the company


• To liquidate shares of founders, private equity investors, and promoters


• To enable easy trading of future capital or existing holdings by becoming publicly traded.

Once the shares are launched, they are available in the public market just like regular shares are traded. When it comes to pricing and violation, IPO is a lot more different than NPO. Based on the company's market capitalization, the price of an IPO is decided. The company's valuation is measured by the price to book and price-to-earnings to determine the offer's attractiveness and the listing price of the IPO.

What is the Difference Between New Fund Offering and Initial Public Offering?

IPO is the initial offer made by the company to the public for a subscription of its shares. In comparison, NFO is the first offer of units in a mutual fund scheme just launched and shown to the investors.

Let us look at the difference between NFO and IPO on three parameters:

• Pricing : Pricing is an essential parameter since it is based on the company's value of past and future prospects and the company's fundamentals. The price at which shares are offered helps the investors determine whether they are offered a discount or premium to its valuations. Shares that are offered at a discount rate has greater demand in an IPO. On the other hand, in NFO, the units offered are the face value of the unit. Therefore, these units do not show the actual value of the investment.


• Performance : A company creating an IPO is in existence and typically engaged in several operations before stepping into an IPO. This helps the investors get a clear idea about the company's past performance, strength, weakness, and market capitalization before planning to invest. Whereas, in NFO, the investors do not get to see the company's past performance and other measures to evaluate a company. They could only look at the performance of other several schemes managed by the fund manager and fund house that are offering NFO to get a clear understanding of the approach and philosophy of the fund management.


• Listing price : Once the IPO is over, the price of shares at which they are listed and traded on the stock exchange depends upon the judgment of the market people on the profitability and prospects of the company. On the other hand, the Net Asset Value (NFA) of the scheme in the NFO reflects the securities of the recent market value held in the portfolio.


• Usage of Funds : In IPO, the funds raised by a particular company is used for several business purposes like repayment of debts, expansion of the company, or to lower the stake of promoters in the company. NFO is launched where fund managers lift all the funds to invest in securities and funds. The primary objective behind raising funds is to capitalize on a trending theme of investment.


• Listing : IPO is listed in the stock exchange above or below the decided price band. Therefore, if the price rises up on the listing day, investors can easily secure a good profit.

In NFO, the fund is gathered at the start and then it is invested based on the Net Asset Value (NAV), which can be below or above the face value.

• Valuation : Valuation of a company entirely depends on the performance, company's value and more. Whereas in NFO, the total fund is split and invested in the form of units.


• Risk : The risk involved in IPO is an internal risk that can be exposed to the stock market. Whereas in NPO, the risk appetite is medium to low and considered ideal for all the investors.