New issues have always had a certain degree of excitement attached to them. When a firm launches a new issue it is known as an initial public offering (IPO) but in the case of a mutual fund, it is called New Fund Offerings (NFOs). Both IPOs and NFOs are primary market offerings and a way of raising money from the public. Like an IPO, investors can also invest in a mutual fund for the first time through an NFO.
Both IPOs and NFOs give investors an opportunity to invest from the start. IPOs in case of equities and NFOs in case of MFs.
In this article, we focus on understanding both concepts in much greater detail and finding out the similarities and differences between them.
NFO
When an asset management company (AMC) or a mutual fund announces a new scheme to raise capital, they launch an NFO. It allows the public to invest in the pool for the first time. The money raised is mainly used to invest in securities like bonds and equity.
During the NFO, the new mutual fund schemes are launched by these companies. The NFP is offered by the AMC or MF only for a specific period of time at a specified price known as the offer price.
During this period, the investors can purchase units of the new scheme at this offer price which is usually fixed at ₹10. Once this period is over, the new mutual fund scheme is listed and post listing, the units of the scheme can be bought at the commanding Net Asset Value (NAV) of the fund.
Since the offer price is usually set at ₹10, people who invest in NFOs gain handsomely during the listing. But since there is no past data available for the firm, it is important that investors research the past performances of similar fund schemes as well as that of the fund house hosting the NFO before investing in one.
IPO
IPOs are a market launch of a firm that wants to go public by selling its stocks which in turn raises capital for the firm. From a startup to an old company, any firm can launch an IPO and change its status from private to public.
In an IPO, the promoters open the sale of their shares to the public. The issue is open usually for 3 days at a pre-fixed price known as the offer price. In these 3 days, investors can apply for the IPO at the offer price. After that, the shares are allotted and then the stock is listed on the exchanges where you can buy and sell its shares like any other stock.
How do they differ?
Pricing: The offer price of IPOs is based on the fundamentals and valuation of the firm while NFO is generally launched at the face value of ₹10 per unit. Also after listing the face value does not matter and the units are bought at the commanding Net Asset Value (NAV) of the fund.
Valuation: It is an important aspect of an IPO since it is necessary to derive a fair value for the offer price as well as the listing price of an IPO. It does not matter in the case of an NFO. There is no valuation in the case of an NFO, the money collected is divided into units.
Funds: An IPO generally raises funds for repayment of the debt, expansion of the firm, and other corporate purposes while an NFO raises funds to invest in securities like equities and bonds.
Performance: When a company launches an IP, it discloses its past performances, earnings, balance sheet to its investors. While in the case of NFO, there is no past performance to declare.
Risk: IPOs are preferred by investors with a higher risk appetite as it gives better returns but are very dependent on the markets. Meanwhile, NFO is generally picked by investors with a low-risk appetite.
Both IPO and NFO are used to raise capital and have the potential to generate strong gains if invested wisely. However, before investing it is important to make sure you do proper research. IPOs generally give higher returns but the risk is also higher while NFO is picked by low-risk investors.