An initial public offering (IPO) and new fund offering (NFO) invite new investors to invest in them. However, an IPO invites investors to invest in the shares of a company that is offering shares to the general public for the first time. NFO meaning is simple as it invites investors to invest in the units of a new mutual fund scheme that is offering units to the general public for the first time. This article discusses NFO Vs IPO: # Key Differences To Know Before Investing. Before that, let’s discuss NFO meaning in detail.
What is NFO?
Before we discuss the key differences between NFO and IPO, let us understand what is NFO meaning. Whenever a mutual fund house launches a new mutual fund scheme, it invites the public to invest in the scheme. The fund house does this through the new fund offering (NFO) process. During the NFO period, the fund house tells the prospective investors about the objectives of the scheme, the investment philosophy, the fund manager, the schemes they have handled earlier, and their performance. The fund house also informs about the minimum investment amount through SIP or lumpsum. This is all about NFO meaning.
The NFO is open for a specified number of days. The investors can invest in the scheme either during the NFO period or any time after that. Now that we understand the NFO meaning let us look at the differences between NFO and IPO.
NFO Vs IPO: Key Differences To Know Before Investing
Some of the key differences between an NFO and an IPO include:
|New Fund Offering (NFO)
|Initial Public Offering (IPO)
|Who does it & purpose
|A new fund offering (NFO) is done by a mutual fund house when it launches a new scheme and offers units to the general public for the first time. The purpose is to invite investors to invest in the scheme and benefit from it. This is all about NFO meaning.
|An initial public offering (IPO) is done by a company when it is offering shares to the general public for the first time. The purpose is to invite investors to invest and become shareholders in the company’s growth story.
|How are funds used
|The funds raised from the NFO are invested in various asset classes such as equity shares, fixed income instruments, commodities (gold, silver, etc.), etc., or a combination of these as per the scheme’s objective. The purpose of funds is specified in the NFO documents such as Scheme of Information Document (SID) and Statement of Additional Information (SAI).
|The funds raised from the IPO are used by the company for various purposes such as debt repayments, setting up of new units, acquisitions, corporate general purposes, etc. The purpose of funds is specified in the IPO documents such as Draft Red Herring Prospectus (DRHP).
|Allotment to investors
|When the NFO closes, investors are allotted the mutual fund scheme units. The units are usually allotted at a net asset value (NAV) of Rs. 10.
|When the IPO closes, investors are allotted shares of the company. The shares are allotted at the issue price. The issue price is fixed within the IPO price band depending on the demand (subscriptions received during IPO).
|Listing of units/shares
|Once the NFO closes, the units are listed on the stock exchanges such as BSE and NSE in the case of closed-ended schemes. The trading of units may happen either at NAV, premium, or discount to NAV.
|Once the IPO closes, the shares are listed on stock exchanges such as the BSE and NSE. The trading of shares happens in the secondary market.
|Buying and selling of units/shares
|The NAV of the units is calculated depending on the market value of the scheme’s underlying assets and the number of units. The fund house declares the NAV at the end of every business day. In the case of an open-ended scheme, the units can be bought and redeemed with the fund house at NAV.
|The company’s share price depends on many factors such as demand and supply of shares, the company’s earnings, how the sector is performing, etc. The shares can be bought and sold through the stock exchanges such as the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
|In an NFO, the investor is handing over their money to an expert fund manager. The fund manager further invests the investors’ money. The fund manager is well qualified and experienced and has a research team to back investment decisions. Hence, the risk involved in investing in a mutual fund NFO is relatively lower compared to investing in an IPO.
|In an IPO, the investor is handing over their money to the company. The company will use the money as specified in the IPO purpose. The purpose may or may not result in the share price going up. Hence, the risk involved in investing in an IPO is relatively higher compared to investing in an NFO.
The end purpose of both; IPO and NFO is to generate wealth for their investors. However, both work in different ways in terms of deploying funds, risks involved, etc. In the above section, we have discussed what is NFO, NFO meaning, and the difference between NFO and IPO. Now that you have all the information handy, you can take an investment call on the upcoming NFO and IPO.