Imagine acquiring the next big thing in the stock market- getting it before buzz turns into a boom. Thats IPOs and NFOs. Both attract significant attention from both skilled investors and beginners due to the expectation of high returns. Both offer an opportunity to invest in something new and full of potential to generate a handsome return. Though theyre different, people often get confused about which one they should bet on. An IPO gives a chance to get a stake in a company's future before it launches in the stock market, while NFO allows you to dive into a new mutual fund scheme, hoping to make its mark. If youre wondering about where to put your first or next investment bet, this article is for you to decode the key differences between both investments to make a smart and informed decision.
What is an IPO?
Initial Public Offering, also known as IPO, occurs when a privately held company offers its shares to the public for the first time to raise funds to grow its business. After the IPO, the company shares are publicly available to trade on the stock exchange. It benefits investors by applying for the first time, as highly subscribed IPOs generally reward investors with higher returns on their invested money without waiting long, and vice versa. The stock can be held even after the IPO launch, unlike other stocks in the portfolio.
What is NFO?
New Fund Offer (NFO) is the launch of a new mutual fund scheme by any asset management company (ASM), which is likely an IPO for a mutual fund where investors can buy units of the new mutual fund scheme at a fixed price, which generally could be Rs. 10 per unit during the subscription period. It helps Asset Management Company to raise funds to invest in the asset outlined in the fund's objective.
Key Difference Between IPO vs NFO
IPO vs NFO: Pricing
Pricing is an important consideration as it allows investors to determine whether the money they are investing in buying the IPO or NFO is discounted or premium to its value. Shares that are available at great discounts have greater demand in an IPO.
On the other hand, NFOs, the unit offered, is the face value of the unit, so they do not show the actual value of the investment.
Verdict- IPOs are more transparent than NFO in pricing.
IPO vs NFO: Performance
A company offering an IPO, generally backed by a long business history before entering the stock market, allows investors to get a clear idea about the companys past performance, strengths, weaknesses, and market capitalization before investing.
On the flip side, in NFO, investors dont get an opportunity to evaluate a companys past performance. They can only look for the performance of other related schemes of the fund house offering NFO to get a clear understanding of the approach of Asset Management Company.
Verdict- IPOs provide a clear picture of the companys past performance, while it's not available with NFO.
IPO vs NFO: Listing Price
Once the IPO is done, the share price at which the stock is trading (selling or buying) depends on the judgment of the market people, profitability, and the prospect of the company.
While in NFO, the Net Asset Value of the scheme reflects the securities of the recent market value held in the portfolio.
Verdict- IPO listing prices are influenced by market sentiments, whereas NFO is grounded in the actual market value of the underlying asset.
IPO vs NFO: Usage of Fund
In an IPO, the funds raised by the investors are used in various business activities such as repayment of debt, expansion of the company, buying new assets, or lowering the stake of the promoter of the company.
While funds raised in NFO are used by fund managers to capitalize on a trending theme of investment.
Verdict- Both use money to meet their financial needs. IPO uses money to grow its business, while in NFO, Asset Management Company uses money to build its portfolio.
IPO vs NFO: Listing
IPOs are listed in the stock exchange below or above the decided price band, depending on subscription. For instance, if the IPO is highly subscribed, the chances of listing price could be higher and vice versa.
On the other hand, in NFO, the fund is gathered and then allocated to the different assets based on the net asset value, which can be below or above the face value.
Verdict- Both are prior investment options with different post-investment behaviour.
IPO vs NFO: Valuation
IPO valuation purely depends on the companys performance and its value. On the other hand, in NFO, the total fund is split and invested in the form of units.
Verdict- The valuation in an IPO depends on the companys performance, whereas in NFO, the gathered funds are distributed in the unit, and the performance of the unit depends on the asset it is allocated to.
IPO vs NFO: Risk
The risk associated with the IPO is internal and can be exposed to the stock market, while NFO, being a mutual fund product and managed by skilled fund managers, is considered less risky.
Verdict- Risk is associated with both IPO and NFO, but NFO is comparatively less risky than IPO.
Conclusion
While both IPO and NFO provide an opportunity for early entry, they differ fundamentally in structure, purpose, and valuation. People get very excited at the launch of IPO and NFO as they expect a high return on their investment by applying for it. IPO offers an investing opportunity in a single company share going public for the first time, with the share price driven by demand, company performance, and market sentiments. On the other hand, NFOs are a new mutual fund scheme where the collected funds are used in buying different assets to build a portfolio to generate high returns. Choosing between IPO vs NFO depends on individual financial goals, risk tolerance, and understanding of the underlying offering. IPOs often give higher returns, but also come with market volatility. Whereas NFOs provide diversification and professional fund management.