What is the Difference Between NFO and IPO?
While it is easy to confuse a New Fund Offer (NFO) with an Initial Public Offering (IPO), the two have different financial roles. A new mutual fund’s units are sold for the first time in an NFO, allowing investors to get involved with a new scheme. Whereas, IPOs are where companies offer their shares to general investors for the first time. Hence, enabling them to become shareholders. Furthermore, investors need to know what makes NFOs and IPOs different because they come with varied chances, risks, and investment dynamics. In this blog, you will understand what is NFO and IPO and their differences.
Key Highlights
- A new mutual fund scheme introduced by an AMC is called NFO which is open to the public for investing in various financial securities. Meanwhile, IPO is the process of selling shares to the public for the first time when a company becomes public from a private entity.
- To invest in an NFO means buying into a brand new mutual fund at a fixed offer price. Later, units will be bought according to net asset value (NAV) as determined by the fund after the offer period. Whereas, shares of stock are available through IPOs at prices calculated based on their market valuation while they go up and down in value following firms’ listing.
- NFOs are often less risky and suited for conservative types of investors as they rely on NAV for valuation. Whereas, IPOs are more speculative as they mirror the performance and expectations of organisations. Hence, have a great impact on price.
- A Demat account is not needed when investing in NFOs because you may still purchase them without opening one. Whereas, you must have an account to deal with buying or selling shares after participating in an IPO.
Table of Contents
What is NFO?
An NFO is a fresh mutual fund scheme that is presented to the public for the first time by an AMC. An NFO seeks investors willing to invest in its assets, which will be allocated among various forms of financial securities by the AMC’s asset allocation plan. As such, the fund may access equities, bonds, and other instruments when gathering its investments according to each scheme’s stated purpose.
What is an IPO?
An IPO is when a company goes from private to public by selling its stock to anyone who wants to buy shares. The primary reason for having an IPO is usually to raise cash. However, there are various reasons behind it like making it easy for founders, early investors, and sponsors to get rid of what they own or exit their positions. In addition, the firm can also get new investors by going public. Thus, increasing the number of shareholders that will be owning stakes in its equity.
NPO vs IPO: Know the Difference
The difference between a New Fund Offer (NFO) and an Initial Public Offering (IPO) is important for making sound investment choices. Although both supply their first-ever chances, there are various financial instruments and uses served by them. So, let’s discuss the difference between NFO vs IPO below given table:
| Characteristics | New Fund Offer (NFO) | Initial Public Offering (IPO) |
| Meaning | An Asset Management Company (AMC) introduces a new mutual fund program through NFO. | A company goes public by issuing shares and getting listed on the stock exchange through IPO. |
| Intent | NFO is for launching a new mutual fund program. | IPO is for making a company’s stock available to the public. |
| Risk | NFOs are suitable for investors with a low to moderate risk appetite. | IPOs inherently involve the risk associated with exposure to the stock market. |
| Valuation | Valuations in NFOs are not significant as funds are segregated into units and invested in the markets. | IPO pricing and attractiveness depend heavily on Price-to-Book (P/BV) and Price-to-Earnings (P/E) ratios. |
| Listing | NFOs commence operations after the funds are utilised to purchase market shares. | IPOs become tradable on the stock market after listing, and their prices may be above or below the initial range, potentially offering gains to investors. |
| Succeeding Listing | After an NFO, the Net Asset Value (NAV) of a mutual fund scheme reflects the current value of its underlying holdings but does not include potential growth. | Post-IPO, stock prices are determined by market perceptions of the company’s future and profitability. |
| Issued By | NFOs are introduced by Asset Management Companies. | IPOs are introduced by companies. |
| Performance | For NFOs, investors lack prior performance data but can assess fund management philosophy by analysing the performance of other schemes managed by the fund manager. | With IPOs, investors can assess the company’s core competencies and historical success. |
| Fund Utilisation | Funds collected through NFOs are used by AMCs to purchase bonds and stocks. | Companies raise capital through IPOs for various purposes such as business promotion, expansion projects, and more. |
| Demat Account Requirement | NFOs do not necessitate a Demat account. | IPOs require a Demat account. |
Conclusion
NFOs and IPOs are two different investment opportunities that have different objectives and mechanisms. The prior helps investors in entering a new mutual fund scheme usually at a fixed price. Whereas, the latter offers a chance to buy shares from companies transitioning from private to public allowing one to become part owner of those institutions. Moreover, each alternative has its risks and rewards hence investors need to apprehend their discrepancies. It is crucial to understand how NFOs and IPOs work to enable investors to make better decisions in their finances.
FAQs on NFO and IPO
Yes, the absence of a performance track record makes investing in an NFO risky. Without prior historical data, forecasting how the fund will behave in different market conditions becomes difficult, increasing the investment’s risk compared to established funds that have already generated returns.
The duration for NFO and IPO investments to remain open can differ from each other. This is because NFOs have longer subscription periods that last for weeks. Whereas, IPO has a shorter subscription period in comparison that lasts for a few days.
No, you cannot withdraw money during the period of NFO opening since this is the time when investors buy units in the newly launched mutual fund scheme. However, later you may sell these units in a stock exchange or wait till the expiry of the term.
NFO profitability varies; historical performance isn't available, making it uncertain.
NFOs and IPOs typically stay open for investment for a few weeks, while specific durations vary.
NFOs (New Fund Offers) can be good if aligned with your investment goals, but they carry risk due to a lack of performance history.