NFO vs IPO: Know the Difference
Written by Manish Kothari
CEO Zfunds
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New Fund Offer or NFO and Initial Public Offering or IPO, are both commonly used terms used to raise funds from the willing investors. In the financial sector, these two terms have more differences than similarities. In this section, we will elaborate on the meaning of these terms and the key differences investors must understand before investing in either. This knowledge will help the investors to align their risk-taking capacities and return expectations with their portfolios.
What Is An NFO?
New fund offer (NFO), is primarily used by asset management companies widely known as AMCs. The major aim of NFO is to launch a new mutual fund investing and saving scheme for the public. Once the experts curate a new scheme, it is offered to potential investors for a limited period at lucrative prices known as offer price. The funds generated are used to buy financial bonds and securities to create wealth. The investor must read all the information related to NFO well as it will provide them with the risk and return expectations, minimum investment amount, and tenure of the investment.
What Is An IPO?
An initial public offering (IPO), is a method where a company invites investors in the primary market to raise funds to support its business operations. Through IPO the company offers its ownership to the general public for the first time and becomes public limited from its earlier privately owned status. The companies list themselves with the stock exchange to offer these shares. The main aim behind an IPO is to fund major cash outflow like expansion, new product development, debt management, acquisition, etc. IPO will result in liquidating the holdings of existing owners or promoters. Once listed on the stock exchange, these shares will trade in the market like any other security and will be subject to market risks.
Key Differences between NFO & IPO
| Criteria | NFO | IPO |
| Meaning | NFO is for a new mutual fund scheme Launch | When the shares of a company are launched for the first time by the public. |
| Who is the issuer | Asset Management companies or fund houses | Private companies who change their status to public limited with the launch of IPO |
| How the collected fund is used | The funds collected from the pool of investors are further invested into bonds, equities, gold, and real estate or fixed-income options. | The collected fund is used in companies’ business operations to finance major cash outflows like expansion, international licenses, and patents, acquisition and mergers, new facility development, research, innovation, etc. |
| How can the investors invest | Investors can simply go on the official website of fund houses or Asset management companies and can apply for their NFOs. | Investors need to have a Demat account to trade in equity. |
| Listing Gain to investors | Investors do not have any listing gains as they do not deal with individual investments in the portfolio. | Investors can trade the equity in stock markets and are entitled to gain with the changing values of the share. |
| Purpose of investment | Investors can invest in NFO if they are looking for moderate risk levels and moderate returns. | If the investor has a high-risk appetite and is looking for short-term returns, an IPO can be a wise choice. |
| Valuation | NFOs are not valued as per market fluctuation. The fund collected is divided into small fund units. They have Net Asset Value (NAV) however it does not have any role in deciding valuation. | IPO is valued on the basis of the price /earnings ratio and price/book ratio of the company. A higher valuation will increase the valuation of the IPO. |
| Duration of investment | NFO as a mutual fund scheme, has a minimum duration or period of investment | IPO on the other hand has no time restriction. The shareholder is free to trade in exchange as per their choice. |
NFO VS IPO which is better for investors?
Both NFO and IPO have different aims and they cannot be compared. It depends on the risk-taking capacity and returns expectations of the investor to choose between the two options. For instance, if an investor wants to invest for a longer duration of time, wants to diversify the portfolio to manage the risk and hedge the losses, and has moderate return expectations, then the investor can go for NFO. On the contrary, if the investor has a fair idea about the company and market trends and movement and is ready to take risks and look for short-term/long-term gains he must opt for IPOs.
Conclusion
Here, in this article, it is explained that even if NFO and IPO both are techniques to raise money in the financial market, they are not quite the same. Criteria like issuer, purpose of issue, usage of funds, etc make them apart from each other. They both have their benefits and disadvantages. The investors must prioritize their investment interests before deciding on investing in either of the two.