How IPOs differ from NFOs?

A look at how the oft-mentioned terms IPO and NFO are important for companies and mutual funds, and how they differ from each other.

How IPOs differ from NFOs?

New Fund Offering (NFO) and Initial Public Offering (IPO) are both processes of raising money from the public. NFO is used by mutual fund companies while IPO is used by companies in general. 

What it seeks to do?

In case of an NFO, an Asset Management Company (AMC) generally opens up or extends their presence in a particular market segment or industry. For instance, an NFO may be offered by an AMC that is targeting assets in the banking sector. IPOs, on the other hand, are offered by companies aiming to expand their business or by private companies looking to get listed in the stock exchange. 

Related: Understanding the differences between IPOs and FPOs 

What influences the pricing?

The share pricing of an IPO is influenced by factors such as the company’s price-to-earnings ratio and price-to-book value ratio. Investors consider a company’s performance before applying for an IPO subscription. However, in case of an NFO, people look at the pedigree of the AMC and the viability of the assets targeted. 

Unlike NFOs, shares in an IPO may be offered at a premium or a discount. This depends on the company’s decision, which is based on the expected market reception for the shares. In case of NFOs, the fund is first raised, all NFO-related costs are deducted from it, and the remaining is invested in shares. At this point, the NFO would normally have a NAV of Rs 10.

Related: All about IPOs in India 

How is the raised fund used?

The usage of funds is important in case of IPOs. Proper and effective usage by the company will help appreciate the value invested by the IPO participants. With NFOs, the overall performance of the market is what determines the future NAV of the fund.

Pricing Influencers

The price of the IPO is often perception-based. Market sentiments decide the valuation of the shares in the open market. With NFOs, price doesn’t matter a lot. Most NFOs in India debut at Rs 10 and their price performance is more dependent on the level at which they enter the market.

The Participants

Different types of investors may participate in an IPO. They could be retail investors, institutional investors, or high-net-worth individual investors, with different prices being offered to each category. There is no such classification in case of NFOs.

Related: IPOs that have disappointed investors in the last 10 years

Buying process

Buying shares in an IPO is quite different from regular trading of shares. There are applications to be filed, with possibilities of over-subscription and pro-rata allotment. Purchasing units in an NFO is not very different from the regular purchase of mutual funds. Once the NFO is closed, the fund reopens later and willing investors can invest in it at the prevailing NAV of the fund.

While an IPO comes with more risk and reward attached, in an NFO the reward is lower and the risk is diversified as it is mostly backed by an asset portfolio and not a single stock. When invested after careful analysis and market study, both IPOs and NFOs can reap the benefits of market growth. Check the biggest IPOs launched in 2019 and what to look forward in the coming year.  

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