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What Is The Difference Between NFO & IPO?
Editorial Team - Mar 15 - 9 min. read
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Understanding the difference between IPO & NFO is vital for investors as IPO targets direct access to company shares and NFOs to diverse investment opportunities. The clarity in distinction will ensure portfolio diversification for optimal investment benefits.
While you research the financial market for investment opportunities, two options hold significant places up the ladder: NFOs and IPOs! Both options have distinct features catering to specific investment objectives.
Although both venture into providing investment options, understanding the difference between NFO & IPO will help in strategic financial decision-making aligned to specific risk tolerances.
Let us start with understanding what each of these investment options means before we discuss NFO vs IPO.
What is NFO?
NFO (New Fund Offer) refers to a new mutual fund scheme launched by financial institutions or fund houses, such as an asset management company and life insurance provider. It is used to generate funds from the public to invest in financial instruments such as equities and bonds.
Investors can purchase the units for subscription at a fixed offer price of ₹10 (can be less or more) for a limited period. After the expiry of the NFO period, the units can be purchased at the fund's Net Asset Value (NAV).
Key Objectives
- To help investors access various fund options at a nominal rate
- To cater to specific objectives with various risk tolerance levels that are not prevalent with existing schemes
- To diversify portfolio and benefit from the fund's market growth
At Tata AIA, we offer NFOs with wealth plans to offer dual benefits, investment opportunities and a life cover. --Focused on sustainability, growth potential flexibility, and stability, Investors can compare the options to choose the best investment strategy for their financial needs.
What Is an IPO?
An IPO (Initial Public Offering) refers to a process by which a private limited company becomes a publicly listed corporation. It does so by issuing its shares to the general public at a pre-decided price. Upon issuing the shares, later, they become available on the public stock exchange, and the prices fluctuate based on the demand and the company's performance.
Key Objectives
- Generate capital for the company.
- To enable founders, promoters, and initial investors to liquidate their shares
- To enable trading of the shares on the public stock exchange
Importance Of Understanding The Distinctions Between NFO and IPO For Investors
NFOs and IPOs offer dynamic investment opportunities. Understanding the difference between IPO & NFO will aid investors in examining the level of risk associated with each of them. In addition, they can align their investment choices based on specific financial objectives.
Market-linked# investments are always subject to price fluctuations, and making well-informed financial decisions is a smart way to capitalise on the investment benefits. Furthermore, it will aid in evaluating the long-term performance of the fund options, paving the way to better outcomes over time.
So, let us move on to understanding NFO vs IPO.
Difference Between IPO & NFO
Key Differentiating Factors |
IPO |
NFO |
Issuer |
Privately owned, unlisted companies companies |
Financial institutions or fund houses |
Objective |
To raise capital |
To generate funds from the public to invest in financial securities. |
Indivisible Unit |
Equity Shares |
Fund Units |
Subscription Period |
IPOs are kept open for a short period, generally a few days |
NFOs can be open for a longer duration, say a few weeks |
Pricing |
Companies, with the aid of Investment Banks, decide the price based on the market capitalisation and financial condition. |
The offer price is ₹10 (can be slightly higher or lower), irrespective of the underlying assets. |
Risk Appetite |
Investors with a medium to high risk appetite can choose IPOs. |
Risk depends on the underlying assets. Investors with varied risk profiles from low to high can choose NFOs. |
Valuation |
Valuation is based on the Price-to-Earnings and Price-to-Book ratio and is critical to determining the offer price. A higher valuation can increase the IPO price. |
Valuation does not apply to NFOs as the funds collected are divided into units and invested in the financial market. The face value can be minimal, such as ₹10, and the NAV depends on the prevailing market conditions. |
Listing |
Listed on the public stock exchange below or above the initial price range, providing an opportunity for the investors to gain on the listing day if the price increases |
Listing does not apply to NFOs. The NFOs start functioning after the money collected has been used to purchase the financial securities. |
After Listing |
After the IPO, the shares are traded on the public stock exchange, and the price changes based on the demand for the shares and the company’s performance. |
After the NFO, the fund option acquires the Net Asset Value that denotes the current value of its underlying holdings. However, it does not reflect the portfolio’s growth. |
Investment Opportunities |
Directly invest in the company’s shares |
Different types of NFOs are based on equity, debt, and hybrid fund options. |
Diversification |
Concentrated |
More diversified |
How to Invest? |
Investors should have a DEMAT Account to invest in the IPO. |
Investors can subscribe to the NFO by visiting the official website of the respective financial institution. |
Similarities Between NFO and IPO
- Both IPO and NFO raise money from the public to generate funds for specific purposes.
- The subscription for the NFO and IPO is applicable for a fixed period. However, the subscription for the NFO is available for a more extended period compared to the IPO.
- NFOs and IPOs allow people to invest in the financial market.
- Both NFOs and IPOs allow the entry of new investment options into the market. NFOs introduce new fund options, and IPOs introduce a company's shares to potential investors.
- The companies and the financial institutions issuing the IPO and NFO both incur administrative, marketing, legal, and compliance costs.
- SEBI regulates the operations of both the NFO and IPO.
Conclusion
As NFOs and IPOs are introduced with specific investment objectives, understanding their differences is crucial to making wise investment decisions long term. With an insight into their unique features, investors can align their investment decisions to their individual financial goals and risk appetite. Therefore, venture into seeking clarity on this distinction for financial prosperity in a dynamic market!
