What is the Difference Between an NFO and IPO?

Key Highlights

• The terms initial public offering and new fund offer are used most commonly.
• NFOs are frequently associated with mutual fund organisations, whereas IPOs are used by companies looking to list on stock market.
• Despite having a similar appearance and being attempts to raise capital, IPOs and NFOs differ significantly in a number of important ways.

What is an IPO?

An initial public offering refers to a process whereby a privately held firm changes from an enterprise for which shareholders are allocated shares in the common stock into a public company. Although the initial public offering aims at generating funds for a company, it can also serve other purposes, such as assisting founders, first investors, and promoters in disposing of their holdings or exiting positions. In addition, an initial public offering will allow the company to attract new investors and increase its shareholder base.

Investment banks that assist in the pricing of shares based on various valuation metrics, such as market capitalization and financial performance, are typically involved in the initial public offering process. After an initial public offering, shares of the company are made publicly available for trading and can be subject to fluctuations in their value based on market demand and performance. The initial public offering price determines the initial value of shares, which can be bought and sold by investors on a stock exchange.

Benefits of an IPO

The advantages of an IPO are as follows:

1. Greater Liquidity Investors will be able to sell shares of a company in the stock market once it is publicly traded. This will enable investors to realise their gains in a timely manner and not wait for the share price to be bought back. It increases investor liquidity by enabling the company's shares to be bought or sold at any time.

2. Increase Brand Equity Trust and credibility are the building blocks of a brand. You build consumer confidence in your brand when you make a product or service available to everyone. This also leads to higher sales and more profits.

3. Diversification When a company goes public on an exchange, they're trading shares with other investors. Consequently, there is a greater diversity of investors because no one investor will buy a majority interest in the company's stock. This makes it possible to diversify investment portfolios by owning the stock of a publicly traded company.

4. Raise Money Raising money for a company is one of the reasons to go public. With the SEBI guidelines, a company can benefit from an initial public offering to raise 20% of its shares on the market. That's good for all the businesses that want to expand and do major things.

What is an NFO?

The new fund offering is called NFO. NFO is a new scheme launched by Asset Management Company AMC to raise capital from the public for investments in financial securities such as bonds and stocks, unlike initial public offerings. The investors are given the opportunity to purchase mutual fund units at a fixed offer price of Rs. 10 during the NFO period, which is typically limited. Units may be purchased based on the current net asset value (NAV) of the fund following the end of the NFO period.

Although NFOs are less well-known than IPOs, they may also provide an opportunity for investors to access new mutual fund programmes and potentially benefit from their growth. However, it is important, as with any investment, to undertake research and analysis of risks and possible returns before making investments in NFOs.

Benefits of an NFO

There are some advantages to the NFO in the following areas.

• If you think that a certain business or sector will experience growth in the future, and AMCs launch this specific NFO, there is an investment opportunity.

• You can purchase a larger number of units through an NFO (SIP) as opposed to later making a lump sum payment or using systematic investment plans.

• Allow for the possibility to invest in a small amount of money when current mutual fund unit prices are higher on particular topics, such as tax savings or certain sectors.

• NFOs are excellent if you want to invest for several years in a particular type of mutual fund. It is, therefore, most appropriate for long-term investors.

NFOs Vs IPOs

The table below shows the major differences between NFOs and IPOs.

Conclusion

For both NFOs and IPOs, a fundamental principle of public funding is also the same. However, there is a difference in nature, risk, and potential return. Careful consideration of risks and advantages needs to be given when deciding whether an NFF or an IPO is appropriate. The possibility of selecting an initial public offering is open to investors with a high-risk tolerance for potentially large returns, whereas the NFO will be open to investors who are at moderate or low risk.