NFO vs IPO - What is the Difference? | Espresso

What is the Difference Between NFO And IPO?

If you want to make high and quick returns on your investment, equities are your best bet. Mutual funds and shares are the two prudent instruments that allow you to invest in the equity market. However, do you know how these mutual funds and shares are made available for public investors?

Published on 13 July 2022

The answer is through an Initial Public Offer (IPO) and a New Fund Offer (NFO). When a new share is issued for public investment for the first time, it is known as an IPO, and when a new mutual fund is made available for public subscription for the first time, it is referred to as an NFO.

This article will tell you about the difference between IPO and NFO. Let’s start with the definition of both.

What is an IPO?

As mentioned, IPO stands for an Initial Public Offer. When a company issues its shares for the first time for public investors, it is known as an IPO. In other words, an IPO refers to the first sale of a company’s shares to the public. It is the process through which a privately owned company becomes a publicly-traded firm.

Generally, a company issues its IPO to raise funds from the public to grow and expand its business.

What is NFO?

NFO stands for a New Fund Offer. When an Asset Management Company (AMC) or a fund house launches its mutual fund for the first time, it is known as an NFO. Similar to an IPO, which allows public investors to buy a company’s shares for the first time, an NFO allows public investors to invest in a particular mutual fund for the first time.

An NFO is kept open during a specific period during which investors can purchase mutual fund units at their face value.

Difference Between NFO and IPO

Now that you know their definitions, let’s learn the differences between NFO and IPO:

Particulars

IPO

NFO

Product on offer

An IPO offers equity shares for public investors

An NFO offers mutual fund units for public investors.

Issuer

As per the definition, IPOs are issued by private companies looking to go public.

NFOs are issued by asset management companies or fund houses.

Process of investment

You can invest in an IPO by bidding for it through an online stockbroking platform. A Demat account is mandatory for investing in an IPO.

If you want to invest in an NFO, you can do so by applying for it through a mutual fund broker or directly with the fund house. Also, you don’t need to have a Demat account to apply for an NFO.

Pricing

In the case of an IPO, the pricing of new shares on offer is decided as per the issuing company’s fundamentals.

On the other hand, the mutual fund units of an NFO are allotted at their face value, which is mostly ₹10 per unit.

Performance

When it comes to performance, IPOs are very different from NFOs. The IPO shares can list at a premium or discount to the issue price depending upon the demand and market perception. Some IPOs can provide very good returns to the investors at their listing.

NFOs launch at their face value, i.e., ₹10 or even less, and then the NAV is decided as per the prevailing market conditions.

Risks involved

Since IPOs involve 100% equity shares, they carry high market risks. That is why their prices can fluctuate quickly.

NFOs involve mutual funds, which are managed by professional fund managers. Hence, they involve lesser risks as compared to IPOs.

 

Conclusion

By now, the NFO and IPO difference must be clear to you. Though the purpose of both NFO and IPO is the same, i.e., to raise funds from public investors, they are entirely different investment instruments. While NFOs involve the issue of new mutual funds, IPOs entail the launch of new equity shares for the stock markets.

You should read about the particular IPO or NFO thoroughly and know the risks associated with it before deciding to invest in it.

Chandresh Khona
Team Espresso

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