If you are new to stock market investing, you may find it difficult to spot the difference between Initial Public Offerings (IPOs) and New Fund Offers (NFOs). Prima facie, these terms might sound similar since they connote the fund-raising activity. However, there’s a difference between NFO and IPO. Let’s understand this in detail.
NFO Vs IPO
Strong business sentiment and vibrant markets attract more investors to markets. As investors across trading sites loosen their purses to invest in stocks, the supply of new paper by way of IPOs in the primary market rises. Moreover, mutual fund companies also bring in more NFOs to encourage investor participation.
Difference between NFO and IPO
| IPO | NFO | |
|---|---|---|
| Purpose | Companies launch IPOs when they plan to go public. For this purpose, an IPO-bound company can either issue fresh equity shares or some of the existing investors may sell their shares in the primary market through the IPO. | Asset Management Companies (AMCs/ mutual funds) launch NFOs to expand their portfolio of offerings. |
| What the money is utilised for? | If a company issues fresh shares then the funds raised through the IPO go directly to the balance sheet of the corporation. The company must utilise them as guided in its filings. Usually, the proceeds are used to fund expansion plans, finance the working capital requirements of the business, repay existing debts and to fund acquisitions amongst others. If it’s OFS—offer for sale (wherein a few existing investors offload their stake in the company), the money goes to the exiting investor directly and the company receives none of these proceeds. | Mutual funds deploy money collected through NFOs in capital markets on behalf of investors. Depending on the stated objectives and indicative asset allocation, mutual funds invest NFO proceeds in stocks, bonds, and in other asset classes such as gold. |
| How do you check the attractiveness of any issue? | In IPOs, the companies issue shares at a premium to their face value. For instance, company ABC Limited may issue a share with a face value of ₹10 at a premium of ₹90. In this case, the offer price would be ₹100 (₹10 + ₹90). As an investor you must carefully evaluate whether the premium charged by the company is reasonable. Aggressively priced IPOs usually don’t reward investors, at least in the short term. You should consider the overall business and financial performance of the company before investing. | Since NFOs don’t have any historical performance to go by, you should consider the past performance of the fund house launching the NFO. You should also consider the attractiveness of the targeted asset class—equity, debt, gold etc. at the time of investing. NFOs are launched at face value which is usually ₹10. |
| How do I gain by investing in IPOs vs NFOs? | Your IPO investment starts making profit as soon as the market price (post listing) exceeds the IPO offer price. Sometimes, the first price (listing price) on public markets can be substantially higher than the IPO offer price which results in smart listing gains. Short term investors invest in IPOs for listing gains. While the long term investors hold their shares hoping to reap huge returns in the long run. | As the Net Asset Value (NAV) of the fund rises, you stand to gain and vice-a-versa. The quantum of gains largely depends on market conditions, the nature of the scheme, and the indicative asset allocation. For instance, equity oriented schemes can be more volatile but they can help you create long term wealth. While on the other hand, debt funds can be less volatile but their return potential is moderate as well. |
| Risks involved | The risk may vary depending on the market set up and the fundamentals of an IPO-bound company. Moderately priced IPOs launched by well-established companies having good pedigree of management can be less risky as compared to those having weaker financials and headed by inexperienced management. That said, equity as an asset class, in general, exposes you to higher risk. | The risk profile of an NFO may differ from scheme to scheme. For instance, a debt fund NFO may be less risky as compared to an NFO of an equity scheme. |
| Do I need to have a demat account to invest? | Yes, you must have a demat account to invest in an Indian IPO | You can invest in an NFO even if you don’t have a demat account. |
| Who regulates issuances? | SEBI | SEBI |
To conclude
The primary difference between IPO and NFO is the issuing entity and the issue objectives. While money collected through an IPO may directly go to the company launching the IPO or its shareholders, NFO proceeds find their way into the capital markets.
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