Companies that need capital to grow often raise it from the public. In exchange for capital, the public gets a stake in the form of equity or fund offerings from the business. The performance of these stakes gives investors their returns.
If you didn’t know already, NFOs or New Fund Offerings and IPOs or Initial Public Offerings are the most popular ways businesses raise capital from the public. So, which one should you invest in? Well, look at thedifference between NFO and IPO to find out.
What is an NFO?
New Fund Offers are typically launched by Asset Management Companies (AMCs) or mutual fund houses looking to fund new ideas. The AMC gathers all the money from NFO investments and buys securities like bonds and equities from companies wanting to go public.
These funds typically stay open for a limited period, during which investors can purchase mutual fund units for as little as Rs. 10. After this window, investors can invest at the prevailing offer price. Then, after the term ends, investors can avail of the returns from the fund units at the Net Asset Value (NAV).
Keep in mind that investors that have subscribed to these investments notice better post-NFO listing gains.
Most investors get into investing in these funds when the markets are rising. The idea is they will earn greater returns if the markets continue to rise. More importantly, since NFO units are available for a low price, their losses will be limited even if the market fails. This makes investing in these funds an excellent value for money.
Before we jump into the difference between NFO and IPO, let’s quickly go over some important factors to consider when investing in the former type of investments.
What should you keep in mind before investing in NFO?
Although New Fund Offers look like a good investment opportunity for investors, they come with the same risks associated with regular funds. Therefore, investors must consider the following before investing.
Fund house reputation:
Check the reputation of the fund house offering the mutual fund. Typically, funds offered by Asset Management Companies with a good track record tend to perform better.
Themes and objectives of the fund:
The fund’s objectives, including asset allocation, liquidity, riskiness, expected returns, and more, should be clear before investing. These details help investors determine the viability of the investment. Additionally, investors should also ensure that the theme of the fund is sustainable and has a different strategy.
Investors should check the fund’s past returns and compare them with other index and peer funds before investing. This helps estimate the performance of the fund.
Other important factors to consider are the exit charges on investments, the expense ratio or the funds charged by the Asset Management Company for managing your funds. Investors should ensure these are in the lower range.
Investors should also factor in the investment horizon and ensure that it matches their goals before investing. This helps avoid pre-exit charges.
To make a fair NFO vs IPO investment decision, you must also know the basics about Initial Public Offerings. If you’re unsure what they are, here’s everything you need to know before investing in them.
What is an IPO?
The Initial Public Offering orIPO is how companies raise funds from the public by selling stocks or equities to them. The issuer or the company selling its stocks partner with investment banks to issue the shares. Next, the shares are traded in the open market. Or investors can sell the shares in secondary markets.
Either way, when investors invest in IPOs, they get ownership based on the value of the shares they own. Moreover, the company does not need to repay investors at any point.
What should you keep in mind before investing in an IPO?
Here are a few things investors should consider before making these investments.
The end use of the capital gained from trading shares:
Knowing how much money the companies will raise through shares, the number of shares they intend to sell, and their expansion plans using the capital they raise, helps you make an informed investment decision.
The investment risks and rewards:
While subscribing to an Initial Public Offering helps you become a shareholder of the company, the performance of your shares (and the returns you get) depend on the company’s performance. Therefore, before investing, make sure you review the company’s past performance.
Now that you know all about both types of investments, coming to an NFO vs IPO decision should be easier. But if it isn’t, here is a table elaborating on the difference between NFO and IPO for your reference.
Difference between NFO and IPO
|Characteristic||New Fund Offers||Initial Public Offering|
|NFO vs IPO: Promoter||Fund houses or Asset Management Companies||Private Companies|
|NFO vs IPO: Product traded||Mutual funds units||Company shares|
|NFO vs IPO: Product offered by||Mutual fund promoters or AMCs||Brokerage houses|
|IPO vs NFO: Fund raised for||Investing in funds and securities||Providing funds for business expansion|
|IPO vs NFO:Investment risks involved||Moderate to low risks||High market risks|
|IPO vs NFO: Pricing||NFO value depends on the market conditions when the company launches||The pricing depends on the company’s business and valuation|
|NFO and IPO listing||These funds launch only after the initial funds get invested in the market. NFO listing gains are also typically higher||IPOs get listed on the stock market and allow investors to invest capital in advance. So, in case the stock prices shoot up post-listing, investors gain huge profits|
|IPO and NFO fund usage||AMCs use the capital to buy securities of the company||Companies use the capital to expand their business|
Comparison table between NFO & IPO
Now that you’re aware of thedifference between NFO and IPO, let’s take a look at the similarities between the two investment avenues.
What are the Similarities Between NFO And IPO?
Both IPOs and NFOs raise funds from the public. The subscription to the funds is opened to the public for a fixed period, including marketing, administrative, and compliance costs. Moreover, both investment types typically get listed around market peaks and see a high number of subscriptions over the same period. If the market performs well, NFO listing gainsare high, and so are IPO returns.
With such a detailed overview of the similarities and differences between IPO and NFO, you should have no qualms about choosing one investment avenue over another. That said, if you want to learn more about IPO and NFO, you can visit the Moneyfy website.