From time to time, government and private companies need funds to fuel their expansion and further their operations. To do so, they turn to public investors for raising funds. Here, companies can use two ways to source funds from the public- Initial Public Offering (IPO) and New Fund Offer (NFO). Since these are both primary market offerings, investors often presume them as similar investment avenues.
However, the two are more dissimilar than alike. So, here’s a guide to the similarities and differences between the two.
What is an IPO?
With an IPO, a privately held company becomes a public company when they sell a portion of their stakes. This process extends an opportunity for investors to park their money in the company’s operations and collect handsome returns.
Companies typically initiate an IPO for infusing equity capital to their firm, for raising capital, etc. However, it’s prudent to be an informed investor before investing in IPOs since not every up-and-coming IPO holds the potential for consistent returns.
What is a new fund offer?
Through an NFO, a mutual fund enables public investors to invest in the company’s pool for the first time. Here, a fund house or asset management company (AMC) accepts investments from the public when it initiates an NFO for a fund investing in capital assets viz. securities like bonds and equities.
The AMCs keep the NFO open for a particular duration, and investors purchase the fund units at specified costs. The NFO issuing prices typically remain Rs. 10. Once the AMC closes the new fund offer, investors get the opportunity to buy & sell fund units at the mutual fund scheme’s current net asset value (NAV).
Additional Read: How to Invest in NFO?
NFO vs IPO
|Definition||This is the first time the fund house makes the units of mutual funds available for public investors. NFO represents a new mutual fund scheme.||In case of IPO, any private or government-owned company’s stock goes public via stocks.|
|Issued by||Fund houses||Companies|
|Pricing||The face value of underlying units of the fund are priced at Rs. 10 during the time of allotment, irrespective of the underlying companies.||The value can fluctuate depending on the issuing company’s business fundamentals and valuation.|
|Indivisible unit||Fund units||Shares|
|Initial offerings||Public investors can invest via respective fund houses’ websites/distributors/advisors.||Contrarily, the shares are available only for investment through recognised stock exchanges.|
|Performance comparison||Since the units in a new fund offer are issued for the first time, public investors don’t have any track record to monitor before making an investment decision. Here, investors cannot make investment decisions based on peer comparison as well.||Before investing in IPOs, investors can review the company’s past performance, projections, relative valuations for companies in similar industries, etc.|
Additional Read: Mutual funds vs Stocks: Which is Better?
In a nutshell, through an IPO, the corporation extends its shares to the public whereas, with an NFO, investors receive fund units. When looking for a smart and straightforward way of investing, turn to Tata Capital’s Moneyfy app. Compare multiple investment schemes and enjoy goal-based investing with ease.