This article is about the difference between an IPO and an NFO. First, we describe what an IPO and an NFO are. We then discuss their differences and useful details for investors. We answer the question “What is the difference between an IPO and an NFO”?
What is an IPO?
An initial public offering (IPO) is the process of selling new shares of a private company to the general public. A corporation can raise money from the general public through an IPO. Since there is often a share premium for present private investors, the transition from a private to a public firm can be a crucial period for private investors to completely realize rewards from their investment. Additionally, it enables public investors to take part in the sale.
What is an NFO?
The first subscription offering for any new fund that an investment business offers is known as a new fund offer or NFO. A new fund offer happens when a fund is formed, enabling the company to raise money for security purchases. One of the most popular new fund offers presented by an investing company is mutual funds. The initial buying offer for a new fund depends on how the fund is structured.
NFO vs IPO
In an IPO, the business makes its shares available to buyers. In an NFO, investors can purchase fund units. NFO and IPO both serve roughly the same objectives. The parent firm seeks to raise money in both situations. However, the operational features of the two are where the differences lie. Which is preferable ultimately depends on your needs and goals.
Choosing NFO may be advantageous if you’re a less risk-tolerant investor. Fund units are sold in an NFO at comparatively low costs. As such, if an NFO underperforms post-listing, the losses experienced by NFO investors could be minor.
Although there is a minimum lot size, IPOs also provide shares at a lower price than the exchanges. You must buy many lots if you want to improve your chances of receiving fund units. The IPO investment would be profitable if the share price rises after the company is listed on a stock exchange. You may also sustain significant losses if prices are below the offer price.
Rachit Chawla, CEO & Founder, Finway FSC says “If the person is ready to take the risk, investment in individual stocks is better. If the consumer doesn’t have the appetite or know-how skills risk mitigation for individual stocks then NFO is better because it is professionally managed by a fund manager”. He goes on to add that “Passive investors should always look at NFOs whereas active investors should always study the companies that are available for IPOs. Of course, IPOs are riskier but the reward side is also far higher than NFOs. NFOs risk is low and reward is also significantly low as compared to IPOs”.
Since a firm is already established and actively conducting business when it launches its initial public offering, investors can learn about its core competencies and financial performance.
Investors have nothing to consider in an NFO, though. Since the fund is new, there is no historical data to compare its growth or performance against. Here, the fund manager’s position is essential. To comprehend the strategy, it is advisable to research the fund manager’s background and prior results.
It is also said that investing in an IPO is always preferable to investing in an NFO if it is offered at a price that is reasonable for consideration. This is due to the fact that an investor’s unit allocation in a scheme will be lower than the Net Asset Value (NAV) of similar schemes. Only when an NFO presents an investment opportunity that is not currently available is investing in one advised.
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An initial public offering (IPO) is the process of selling new shares of a private company to the general public.
The first subscription offering for any new fund that an investment business offers is known as a new fund offer or NFO.
Net Asset Value.
High-risk appetite investors should go for IPO.