What Is the Difference Between New Fund Offer (NFO) and Initial Public Offering (IPO)?
New Fund Offer (NFO) denotes the first-time offer for subscription of scheme units being launched by a mutual fund. This may be considered similar to Initial Public Offers (IPO) of equity shares, wherein the company offers shares to the public. Before discussing the comparison between NFO vs. IPO, it is important to know how NFOs and IPOs work.
How does NFO work?
An NFO is kept open for subscription for a fixed period, wherein the funds are collected by the mutual fund scheme and invested as per investment objective of the scheme. The units of mutual funds are allotted at face value. Once the units have been allotted, the Net Asset Value (NAV) will change as per the portfolio valuation.
How does IPO work?
The company can launch an IPO to issue new shares to the public or offer a partial or full exit to the promoter’s/ shareholders’ holdings. An IPO can also be a combination of a new issue and OFS (Offer for Sale). Once the IPO shares have been credited to the successful applicants' demat accounts, the exchange listing takes place, and the shareholders can freely trade their shares on stock exchanges.
NFO is used to raise funds from mutual fund investors, while IPOs raise funds from equity investors. As such, an investor need not mandatorily have a demat account for investing in NFO, while one must have a demat account to apply in an IPO.
While NFOs are launched to capture investment opportunities across different market segments, IPOs refers to the process of offering shares of a private corporation to the public in a new stock issuance
While NFO is always a new issue of mutual fund units, IPOs may be a new issue of shares or an OFS by the company's promoters/ existing shareholders.
There is no ceiling for the NFO size, and accordingly, mutual funds can allow any number of units that can be allotted during the NFO (minimum can be from Rs 500 to Rs. 5,000). On the other hand, IPO issue size has to be declared in advance, and the company cannot accept subscriptions more than the issue size. In case of issue oversubscription, the company must allot the shares to the applicants as per the prescribed rules and refund the balance subscription amount within the prescribed period.
Usage of funds raised
NFO funds are always retained by the mutual funds and utilized for constructing an investment portfolio as per the investment objective. In contrast, the company may retain IPO funds in case of a fresh issue of shares or transfer the amounts to the selling shareholders in OFS.
Investors do not have any performance track record for NFOs, as the units are issued for the first-time post NFO. The investment decision is based on the investment objective, investment strategy of the fund, macro- economic factors, fund manager’s performance track record, etc. On the other hand, investors can analyse the company's past performance before investing in the IPO.
Making an investment decision for an NFO cannot be made based on the peer comparison, i.e., the historical performance of similar mutual fund schemes. In contrast, investors tend to make investment decisions for IPOs based on the relative valuations for the offer price as against the valuation ratios for companies operating in similar sectors, industries, etc.
Investors can liquidate their NFO investments by making redemptions transactions at the prevailing NAV (Subject to exit load, if any). In contrast, IPO investments can be liquidated by selling the allotted shares on the stock exchanges at the prevailing exchange price. Such price is determined based on the demand-supply of such shares on the exchange platform.