Difference Between NFO and IPO

By Angel Broking | Published on 1st August 2020 | 232

Difference Between NFO and IPO

Both IPOs and NFOs are used to raise funds from the market. But, do you know their differences? If not, then read on. In this blog, we are going to discuss NFO vs IPO – critical differences between the two necessary financial instruments, and other aspects that will help you with decision making.

From time to time, companies raise funds from the market to meet a wide range of expenses – from repaying debts, to fund business expansions or acquisitions, reduce promoter’s stake in the company, or to invest in new funds. Now there are two ways to do it – IPO and NFO. By definition, IPO stands for initial public offerings, whereas the company offers its shares to private investors. On the other hand, NFO means new fund offerings in which company units are offered to investors.  Both are fresh offers to raise funds from the market, but there are quite a few distinctions as well as similarities between the two. To know the answer, read on!

Let’s begin with understanding both IPO and NFO in detail.

What is an IPO?

Initial public offering (IPO) is a way for companies to seek private investment for the corporation. Companies need to list themselves with the stock exchanges to offer IPO scrips. Any company, from an age-old big wig or a start-up, can launch IPOs. Normally, one or more investment banks underwrite the entire IPO offer on behalf of the company.

IPO has a strong implication on the nature of the company’s holding. When the company lists with the bourses to offer IPOs, its status changes from a privately owned company to a public company.

IPOs are issued for various purposes

  • To bolster the company’s equity capital
  • To liquidate shares of promoters, founders, and private equity investors
  • To enable trading of existing holding and to make it easier for the company to raise funds from the market in future

Once launched, the shares are available to trade in the secondary market like common shares.

IPO is different from NFOs in terms of valuation and pricing. Price of an IPO is based on the company’s market value, the better its value, the more funds the company can raise from the market. Company’s valuation is measured by the price-to-earnings (P/E) and price-to-book (P/BV) ratios to determine the listing price of the IPO shares and the offer’s attractiveness.

Factors to know before investing in an IPO

  1. Before deciding the merits of an IPO offer try to find out as much as possible about the company
  2. Read about the company’s details in its prospectus; for each company has to release a prospectus containing all its IPO related details, which will be your guidebook while selecting IPO offers to invest
  3. Select IPO proposals that are backed by reliable underwriters

Although IPOs are popular, it involves cost, especially underwriting and legal expenses.

What are NFOs?

Often NFOs are confused with IPOs which are issued by private and public companies.  An NFO is a new fund offering, is launched by an asset management company (AMC). An asset management company will announce an NFO when it has to raise capital from the market to invest in a trending investment theme.

NFOs are offered for a specific period, during which investors can purchase units of the mutual funds. An NFOs face value is calculated at Rs 10. However, the valuation of an NFO fund is irrelevant since the total investment is split and then invested as units in the market. Usually, NFO offers significant gain to investors once it is listed. After the initial investment period gets over, investors can subscribe to these funds depending on its net asset value or NAV.

  • NFOs are good offers if you are interested in investing in mutual funds. It gives you new opportunities to diversify your portfolio
  • The open-ended NFO units can be traded in the market like stocks and are great for liquidity
  • These are limited period offers and designed to offer a significant return to investors

A comparative study of NFO vs IPO

As we have discussed what IPO and NFOs are, let’s look at the differences between NFO and IPO.

Parameters NFO IPO
Definition First-time new fund launched by an asset management company

 

NFO means new mutual funds

IPOs are issued when companies list themselves for the first time.

 

IPO means new stocks

 

Valuation In NFO the total fund is split and invested as units IPO valuation depends on the company’s performance, measured by price-to-earnings and price-to-value ratios
Price NFOs are launched at face value of Rs 10. However, this value is irrelevant as the NAV value is decided based on market condition The valuation of IPO shares depends on issuing company’s business fundamentals and attractiveness of the offer
Usage of funds NFO is launched to raise funds to invest in bonds and securities by fund managers to capitalise on a trending investment theme The funds raised used by company’s on various business purposes, expansion, repayment of debts, or to reduce promoter’s stake in the company
Listing The fund is initially collected and then invested based on NAV value, which can be above or below the face value IPOs need listing with the stock exchanges, above or below a pre-decided price band.  Investors can secure a handsome gain if price shoots up on the day of listing
Risk It is ideal for investors with moderate to low-risk appetite IPOs have an inherent risk of exposure to the stock market
Investors There is no categorisation The IPO can target one or multiple categories of investors, namely, retail, institutional, HN1

 

Conclusion

Both IPOs and NFOs have the potential to deliver great gains and early market advantages if invested wisely. Whether you select to invest in IPOs or NFOs, make a decision only after considering all aspects to your satisfaction.