Explained: How Are IPOs Different From NFOs?

From LIC, and Paytm to Zomato, many Indian companies have caught the IPO fever in the past couple of years or so, right? While shares of some have been performing well, many others have tanked, hence disappointing those who invested their hard-earned money into them.

Given that IPO (Initial public offering) is the process by which a private company goes public by offering the sale of its stocks to the general public, usually for the first time, there is another first time subscription process that investors often confuse with IPOs. It's the NFOs!

So what exactly is the difference between NFOs and IPOs, despite both usually being the first time offers for subscriptions? Read on as we unfold the same.

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Also Read: Does It Make Sense To Take The SIP Route For Mutual Fund Investments?

What is NFO?

Through a new fund offer (NFO), mutual fund houses allow the public to invest in their pool for the first time. An asset management company (AMC) or fund house accepts public investments when it launches an NFO to raise capital.

The fund houses keep the NFO open only for a certain duration of time, and investors will be purchasing the fund units at the stipulated cost during this period. Generally, the issuing price of NFO is Rs 10. Once the NFO closes, investors can purchase fund units at the prevailing net asset value (NAV) of the mutual fund scheme.

AMCs usually utilize NFO proceeds to raise capital, buy securities like equity and bonds and/or launch new mutual fund schemes during NFO. It may also use the capital raised during the NFO to buy securities in the new fund¡¯s portfolio after the NFO has closed.

What is IPO?

Simply put, an IPO is a process through which shares of a private company are offered to the public through new stock issuance. As IPO¡¯s primary objective is to raise money by borrowing through the issue of shares to the public via the first public invitation in the stock market, it is thus termed an ¡®Initial Public Offer¡¯. An IPO also marks the transition phase of a privately held company into a public company.

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Also Read: Not Just Paytm, These 18 Stocks Have Tumbled Over 40%-60% Since IPO Last Year

How does an NFO differ from an IPO?

Broadly saying, yes NFOs may seem like IPOs, with the only difference being that they are carried out by a mutual fund/AMC rather than a company trying to go public. But that's not all. These are some of the other differences between NFO and IPO.

Issuance

NFOs are issued by fund houses, whereas IPOs are issued by companies.

Divisible unit

Mutual fund units are divided in NFO, whereas shares of the company are divided in IPO.

Pricing

NFO pricing level is mostly in the form of a face value of Rs 10, whereas the share price range in IPOs is dependent on multiple factors that affect the fundamentals of the issuing company.

Listing

NFOs are available for public investment usually on the respective websites of fund houses and then after NFO closes the mutual fund scheme gets launched by AMC and/or the intended securities are bought, whereas IPO investing for subscription is done through recognized stock exchanges like NSE and BSE

Relevance of Valuation

Valuations are mostly irrelevant in the case of NFOs because the funds collected are just split into units and invested in the market.

But in the case of IPOs, valuation plays a key role in tasks such as determination of listing price and offer¡¯s attractiveness. Valuation is usually measured P/E ratio (price to earnings ratio) and P/BV ratio (price to book value ratio).

Also Read: 5 Big Blunders To Avoid When Investing In Any Company's IPO

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