Companies frequently need to raise funds for continuing their operations and expanding their businesses. They often reach out to public investors for sourcing these funds. There are two main ways in which a company can raise funds, an IPO and an NFO.
Both IPOs and NFOs are used to raise funds from the market. But new investors are often unaware of their differences. Here, we will discuss NFO vs IPO, highlight critical differences between the two and share other aspects that can help investors in their decision making.
Let’s start with a basic understanding of the concepts of IPO and NFO in detail.
What is an IPO?
Initial public offering (IPO) is a way for companies to generate private investment for their fund requirements. Under this method, companies first list themselves with stock exchanges to offer their shares to investors. No matter the size of the company, it can launch IPOs when in need of substantial funds. Companies may hire one or more investment banks to underwrite the entire IPO offer on their behalf.
IPO has a significant impact on the composition of a company’s holding. When the company lists with the stock exchanges to offer IPOs, its category changes from privately owned to public limited company.
Why are IPOs issued?
Some of the reasons why companies issue IPOs are:
- To give a boost to the company’s equity capital
- For liquidating shares of founders, promoters and private equity investors, if any
- To enable trading of existing holdings and to allow the company an easier access to the market for raising funds in future
- Once launched, the shares are available to trade in the secondary market like common shares.
Things to know before investing in an IPO
Here are some important points to consider before investing in an IPO:
- Before investing in an IPO offer, investors must try to learn as much as possible about the company.
- Since each company must release a prospectus with information on all IPO details, investors must read through the prospectus details. This can act as a guidebook while selecting the right IPO for investment.
- Opt for IPO proposals that are covered by reliable underwriters.
- While IPOs are popular, it is important for investors to note that these involve a substantial cost in terms of underwriting and legal expenses.
What are NFOs?
Often, investors confuse NFOs with IPOs. An NFO is a new fund offering that is launched by an asset management company (AMC). An asset management company would normally announce an NFO at the time of raising fresh capital from the market. The main objective of raising funds in this case is to invest in an investment theme that is trending and has the scope of generating substantial profits.
NFOs are offered only for a specific period. During this period, investors can buy units of the mutual funds. An NFOs face value is generally set at Rs 10. NFO fund valuation is, however, irrelevant since the net investment is split and further invested in the market as units. NFO generally offers significant gain to investors after being listed. Post the completion of the initial investment period, investors can subscribe to these funds based on the prevailing net asset value or NAV.
Top features of NFOs
NFOs are ideal for investors who are interested in mutual fund investments. It offers new opportunities to investors looking for portfolio diversification. The open-ended NFO units can also be bought and sold from the AMC at any time. These offer higher liquidity. These are limited period offers and are designed to provide significant returns to investors.
Comparison between NFO and IPO
IPO differs from NFOs, mainly from the valuation and pricing perspective. IPO prices are based on the company’s market value. Therefore, the higher its value, the higher funds a company can raise from the market. A company’s valuation is usually measured using the price-to-earnings (P/E) and price-to-book value (P/BV) ratios. This helps in determining the IPO’s listing price, shares and the offer’s demand. Let’s now have a look at the differences between NFO and IPO.
| NFO | IPO | |
| Definition | NFO means new mutual fund. The first-time a new fund is rolled out by an Asset Management Company. | IPO means new stocks. These are issued when companies want to list themselves on a stock market for the first time. |
| Valuation | In NFO, the total fund is split and invested as units. | IPO valuation is based on the company’s performance. This, in turn, is measured using price-to-earnings and price-to-value ratios |
| Price | NFOs are released at face value of Rs. 10. This value is not important since the NAV is decided based on market conditions. | The valuation of IPO shares depends on the company’s business fundamentals and demand for the offer. |
| Usage Of Funds | NFO helps in raising funds to further invest in bonds and securities to capitalise on a lucrative investment theme. | Funds raised through IPOs are used for various business purposes such as expansion, debt repayment, or for reducing the promoter’s stake. |
| Listing | Through NFO, funds are collected and then invested based on NAV. This can be above or below the face value. | IPOs need listing with the stock exchanges, higher or lower than a pre-decided price range. Investors can fetch substantial gains if the price rises on the day of listing. |
| Risk | NFOs are ideal for investors who have a moderate to low-risk appetite. | IPOs come with an inherent risk of exposure to the stock market. |
| Investors | No categorisation. | IPOs are ideal for various investor categories like retail, institutional, HNI, etc. |
Conclusion
Both IPOs and NFOs offer the potential to generate significant gains and allow investors an early market advantage. This, however, depends on the investment strategy adopted. Whether one invests in IPOs or NFOs, it is important to make a decision after considering all aspects and ensuring that they match individual investment goals.
FAQs
- Is it good to buy NFO?
NFOs are preferred over existing funds by investors since a new fund is available at the price of Rs. 10, that is its net asset value (NAV). Investors should invest in NFOs only if they offer exposure to a unique business opportunity that matches personal financial goals and risk appetite.
- How can I buy NFO?
Investors can invest in NFOs either through brokers, online trading accounts, or other online investment platform like Fisdom which offer these investment formats as and when a subscription is announced.
- What is the minimum amount to invest in an IPO?
IPOs reserve 35% of shares from the total issue for retail investors. Investors can not apply for more than Rs. 2 lakhs in an IPO. If a retail investor applies for more than Rs. 2 lakhs worth of shares in an IPO, they are termed as HNI.
- Is IPO first come first serve?
IPO allotment is not done on a first come first serve basis. It depends on the demand of the IPO among investors. If an IPO is oversubscribed due to high demand from investors, then it is allocated to retail investors depending on the total number of shares available in the retail quota divided by the minimum lot size.
- How Many Days Will an IPO Remain Open for the Public?
The subscription list for public issues must be kept open for at least 3 working days. This period cannot exceed 10 working days. In case of a book building issue, the IPO remains open for 3-7 days.
