What is the difference between NFO and IPO?

When looking to invest, you might come across terms like NFO and IPO. Both represent opportunities to invest in a new entrant to the financial market, but there are important distinctions between them.

This article tells you more about the difference between NFO and IPO so that you can decide which might be better suited to your investment goals.

• Table of contents

1. What is a New Fund Offer (NFO)?
2. What is an Initial Public Offering (IPO)?
3. Key differences between NFO and IPO
4. What are the similarities between NFO and IPO?
5. How to Invest in NFOs and IPOs
6. What type of investor does each suit?
7. Risks Associated with NFO and IPO

What is a New Fund Offer (NFO)?

NFO stands for New Fund Offer. This is when a mutual fund launches a new scheme and opens it up to the public for purchase for the first time. This is similar to a new product launch by a company. An NFO allows investors to buy units of the fund at the face value – such as Rs 10 or Rs. 100 or Rs. 1000 – which is a flat rate not dependent on market fluctuations. NFOs seek to gather as many initial investors as possible, setting the foundation for the fund's future growth and performance.

The NFO period can last for a maximum of 15 days for all schemes except Equity Linked Savings Schemes (ELSS) . For open-ended mutual funds, the scheme is re-opened for subscription a few days after the NFO ends. During this period, investors can buy units based on the Net Asset Value (NAV), which depends on market movements and is calculated at the end of each trading day. The NAV on a given day may be higher or lower than the face value, based on the fund’s performance and market conditions.

What is an Initial Public Offering (IPO)?

An IPO, which stands for Initial Public Offering, is when a private company offers its shares to the public for the first time. This move to go public is often taken to raise capital, expand operations, or pay off debts. After the IPO, the company's shares are traded openly in the stock markets. IPOs involve direct equity stakes in a company. This can be appealing to investors looking for direct ownership in business enterprises. NFOs, meanwhile, sell units, which represent ownership in the mutual fund scheme and not directly in the equity asset.

Feature	NFO	IPO
Definition	Launch of a new mutual fund scheme.	A private company launches its shares in the public market.
Purpose	To create a new fund to attract investment.	To raise capital for business expansion or debt repayment.
Pricing	Units are offered at a fixed price, also known as face value, during the offer.	Shares are priced based on anticipated market demand.
Returns	Depends on market conditions and fund management.	Depends based on market conditions and the company’s performance.
Investment options	Purchase is of units that represent ownership of stocks, bonds, or a mix.	Direct equity exposure.
Risk	Professional management and diversification can potentially mitigate risk.	Investors are in charge of their own portfolios and investment is in a single asset.
Minimum investment	Relatively low, can start at Rs 500.	Minimum investment requirements are usually around Rs 10,000 or more.

Key differences between NFO and IPO

Both NFO and IPO mark the first time that an investment opportunity is opened to the public and both seek to raise capital. Both allow investors to purchase securities/units at a set price or price range. Once the NFO or IPO period is over, the securities must be bought based on the prevailing market rate.

What Are The Similarities Between NFO And IPO?

Both NFO and IPO mark the first time that an investment opportunity is opened to the public and both seek to raise capital. Both allow investors to purchase securities/units at a set price or price range. Once the NFO or IPO period is over, the securities must be bought based on the prevailing market rate.

How to invest in NFOs and IPOs

You can invest in an NFO directly through the fund house that has launched the scheme or through a registered mutual fund distributor, an aggregator or a Registrar and Transfer Agent, among other avenues. Both online and offline options are available. To apply for an IPO, you need to log in to your demat/trading account and place a bid. If shares are allotted, they will be credited to your Demat account. Else, you will receive a refund. You can also apply offline through a bank or a broker

What type of investor does each suit?

NFOs are more suitable for investors looking for diversified investment options managed by professionals. IPOs are suitable for investors seeking opportunities to invest directly in individual companies. Such investments may yield higher growth potential but also entail more risk. IPOs may suit aggressive and financially savvy investors who prefer to trade directly in the stock market and are willing to invest relatively larger amounts.

NFOs may suit investors looking for a way to invest in the financial market with assistance from experts who take buy and sell decisions and manage portfolios. They also enable diversification even with low capital.

Risks associated with NFO and IPO

Investing in NFOs and IPOs carry certain risks. For IPOs, a key risk is overvaluation, where companies may list at high prices without proven track records, leading to price drops post-listing. With NFOs, the main risk is uncertainty, as the fund’s performance is untested.

Additionally, all mutual fund and equity investments are subject to market risk, including volatility, slowdowns, geo-political and economic changes and company-specific risks, among others.

Conclusion

Both NFOs and IPOs present unique opportunities and risks. NFOs allow you to enter a fund at its inception, while IPOs allow you to own a part of a company. NFOs can be for equity, debt or hybrid mutual funds, whereas IPOs are only for company stocks. IPOs can offer significant returns if the company grows, but they also carry a higher risk. Understanding these differences can help investors make informed decisions.

Understanding your risk tolerance and investment objectives is crucial before choosing between an NFO and an IPO. Carefully consider the market environment and consult with a financial advisor to align your investment decision with your long-term financial strategy. You can also use tools like a lumpsum mutual fund calculator to assess the potential returns on your investments and accordingly adjust your investment strategy if needed.

FAQs

What is the difference between NFO and IPO?

NFO is the launch of a new mutual fund scheme, while an IPO involves a company offering its shares to the public for the first time. Both are entirely different.

what are the investment options available in NFO and IPO?

NFOs provide various options like equity funds, debt funds, and hybrid funds, allowing for investment in a mix of assets. IPOs offer direct investment into the equity of a company, aiming for growth via share price appreciation.

NFO vs IPO, which is better?

NFOs are more suitable for investors looking for diversified investments with a relatively low minimum investment and managed by professionals. IPOs are suitable for investors with a very high risk appetite who want to invest directly in individual companies.

Can I invest in NFOs via SIPs?

Yes, you can initiate an SIP in a mutual fund during an NFO. You can also opt for a step-up SIP, if the fund house offers one. In a step-up SIP, your contributions are increased by a fixed percentage at regular intervals. An SIP step up calculator can help you assess the potential returns of such a plan.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.