IPO and NFO: How are They Different?

Initial Public Offering (IPO)

 

The process of issuing shares of a private firm to the public in a fresh stock issuance is known as an initial public offering (IPO). 

 

An initial public offering (IPO) allows a firm to raise funds from the general public. The move from a private to a public firm, which often involves a share premium for current private investors, can be a crucial opportunity for private investors to completely realise rewards from their investment. Meanwhile, public investors are allowed to participate in the offering.

 

The prospectus contains information on the initial offer of shares for institutional investors, high net worth individuals (HNIs), and the general public. The prospectus is a long document that describes the prospective offers in detail.

 

The firm's shares are listed and can be traded freely on the open market once the IPO is completed. The stock exchange mandates a minimum free float on shares in both absolute terms and as a percentage of total share capital.

 

Consider an IPO to represent the conclusion of one stage in a company's life cycle and the commencement of another—many of the initial investors want to cash out on a new venture or start-up. Investors in more established private firms that are going public, on the other hand, may prefer the option to sell part or all of their shares as described by Investopedia. 

 

 

Why to invest in IPOs?

 

Investors can become shareholders of the issuing firm by purchasing shares of the company through an initial public offering (IPO).

 

Shareholders are entitled to dividends, bonus shares, and other benefits based on the company's profitability and management's declaration of dividends or bonus issues. Equity has historically outperformed other asset types in terms of returns.

 

As a result, it is wise for investors to keep a percentage of their portfolio in stock. Equity, on the other hand, is regarded as hazardous since share values are subject to rapid volatility depending on economic and non-economic factors, and frequently for no apparent reason.

 

However, in the long term, investing in the stock market may help build wealth by purchasing valuable stocks from reputable firms with a strong business plan and financial performance. 

 

An initial public offering (IPO) provides a chance to identify successful stocks and invest at a low cost in the shares of future industry leaders who will deliver important earnings through stock appreciation. Because of the low price, it is possible to purchase several shares of the issuer firm for a low price. Purchasing several shares of a firm after it has established itself would be prohibitively expensive due to the present market price.

 

(Also Read- Top 15 US IPOs of all time)

 

 

New Fund Offer (NFO)

 

The number of fund houses or AMCs (Asset Management Companies) has expanded in India as the popularity of mutual funds has grown. If you look at the websites of the leading asset management companies, you'll see that they provide a variety of mutual fund plans to investors.

 

But have you ever thought about how these strategies came to be? Through the use of NFOs. You should be aware of NFO if you want to invest in mutual funds. Investing in a mutual fund scheme during the NFO period might be quite profitable.

 

A new fund offer (NFO) is an investing company's first subscription offering for a new fund. When a fund is created, a new fund offer occurs, allowing the business to raise funds for the purchase of assets. One of the most typical new fund options presented by an investing firm is mutual funds. The first purchase offer for a new fund is determined by the structure of the fund.

 

The initial public offering (IPO) is a company's first attempt to sell shares to the general public. NFO, on the other hand, is the first offer of units in a newly created mutual fund scheme that has been shown to investors. 

 

 

Why to invest in NFOs?

 

The fund house uses an NFO to raise money from the public in order to buy securities in the market, such as equity shares, bonds, and so on. Because it is new to the market, NFO is less expensive than current funds. They're similar to Initial Public Offerings (IPOs), in which the general public can buy stock before it's listed on a stock market. 

 

Furthermore, the marketing efforts that go into its promotion make it a can't-miss occasion. However, before selecting one, you may need to use your judgement and knowledge.  

 

(Must read: Initial coin offerings (ICOs))                                                                                                                                                                                                                                                                                                                                                                                            

                           

6 Differences between IPO and NFO

 

Let us look at the difference between NFO and IPO on six parameters:

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IPO vs NFO

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1. Pricing

 

Pricing is an important factor since it is determined by the company's value of past and future prospects, as well as its fundamentals. The price at which shares are offered aids investors in determining if they are being offered a discount or premium to the company's values.

 

In an IPO, shares that are offered at a discount have a higher demand. The units given in NFO, on the other hand, represent the face value of the unit. As a result, these units do not reflect the investment's true worth.

 

 

2. Performance

 

Before launching an IPO, a firm must be established and have a number of activities under its belt. 

 

Before deciding to invest, investors may receive a thorough picture of the company's historical performance, strengths, weaknesses, and market capitalization. Investors in NFO, on the other hand, do not have access to the firm's prior performance or other metrics used to evaluate a company.

 

To gain a thorough idea of the fund manager's strategy and philosophy, they could only look at the performance of numerous other schemes managed by the fund manager and fund house that are giving NFO.

 

 

3. Listing price

 

After the IPO, the price at which shares are listed and traded on the stock exchange is determined by market analysts' assessments of the company's profitability and prospects. 

 

The scheme's Net Asset Value (NFA) in the NFO, on the other hand, reflects the securities in the portfolio with the most current market value.

 

 

4. Usage of Funds

 

The funds obtained by a firm in an IPO are used for a variety of commercial goals, including debt repayment, corporate expansion, and reducing the promoters' ownership in the company.

 

The NFO is a platform that allows fund managers to raise all of their cash in order to invest in securities and funds. The fundamental goal of collecting cash is to capitalize on a popular investing concept.

 

 

5. Listing

 

The initial public offering (IPO) is posted on the stock exchange at a price that is either above or below the predetermined price band. As a result, if the price rises on the day of the listing, investors might easily benefit.

 

The fund is collected at the beginning of the NFO and subsequently invested based on the Net Asset Value (NAV), which might be lower or higher than the face value.

 

 

6. Valuation and Risk

 

The performance, value, and other factors all go into a company's valuation. The whole amount is split and invested in the form of units in NFO.

 

An IPO's risk is an internal one that might be exposed to the stock market. NPO, on the other hand, has a risk appetite that is medium to low and is regarded as excellent for all investors.

 

(Recommended blog: Ultra-short Bond Fund)
 

In conclusion, both IPOs and NFOs have the potential to create big returns and provide investors with a competitive advantage in the market. However, this is dependent on the investing approach chosen. Whether one invests in IPOs or NFOs, it is critical to weigh all factors and ensure that they align with personal investing objectives.