The world of investments is all about choices and sometimes jargon is a little too confusing. Two often confusing terms are NFO and IPO, which represent the abbreviations for New Fund Offer and Initial Public Offering respectively. Though both offer the chances of investment in new ventures, they cater to distinct financial instruments. Therefore, naturally, investors want to know which one is better, NFO or IPO?

In simple terms, an IPO is like buying into a brand-new company that comes in the market, and NFO is similar to a new mutual fund that brings together money from different people. Both have their good and bad sides. We will try to untangle the difference between NFO and IPO in our blog post today, along with their special features and potential benefits and drawbacks. You would clearly know what is an IPO and NFO by the end of it and what difference exists between them in order to further invest in them.

What is NFO (New Fund Offer)?

In the mutual fund space, a New Fund Offer, or NFO, is essentially the launch of a new fund scheme by an asset management company, or AMC. It is similar to when the investment fund is first launched into the market-the initial subscription period. One can buy units of the fund at a predetermined price of ₹10 per unit. This is a main point in the NFO versus IPO debate, wherein the issuing units in an NFO come with a fixed price as opposed to not in an IPO where the prices can be uncertain.

NFOs can be launched for all kinds of mutual funds such as equity funds, debt funds, hybrid funds, and index funds. Every NFO is accompanied by a document called the "Offer Document" which carries all relevant information regarding the fund's investment objectives, strategies, risk factors, and expertise in the hands of the fund manager. This document has to be carefully read before investing in an NFO , which will clarify where the money is going to be invested and what kind of risks lie ahead.

Even though IPOs and NFOs both describe a new investment, investment through NFO offers opportunities to be invested at inception in the fund's underlying theme and also provides potential entry to novel market directions. An NFO may make the portfolio exciting for investing when looking into themes never tried or previously not taken seriously by investment experts earlier. In every investment venture, risk prevails inherently, so, NFO too cannot evade that matter. Still, some relevant details in comparison can bring it in use: its past experience as a manager of funds, the stature of the company which starts such NFO.

What is IPO (Initial Public Offering)?

An Initial Public Offering, or IPO, refers to the sale of shares in a company's stock for the first time to the general public. This is a defining event in the life of any corporation, as it marks its transition from being a privately owned concern to one with freely traded shares on the stock exchange. For the most part, an IPO serves as a main source of capital for a firm that needs funding to expand, conduct additional research and development, or to service its debt.

When an entity decides to go public, it asks the investment banks how much money it should charge in initial terms for its shares and how many shares it should issue. All of this is contained in a document known as the "Prospectus," which details, inter alia, explaining the financial performance of the company, the business model, and the future of the company. It is important to read the prospectus as it provides ample insight into potential growth and profitability of the company before knowing between IPO and NFO.

Now an IPO is also an entry opportunity into a company if the customer feels that is a good company and in future might have multifold growth for the buyer, while being risky. However, difference here is there will be price movements like multiple factors influenced by demand within the market and sentiments leading to major price movements on the investment side. A person will need to continue studying before he makes some investment there.

NFO vs IPO: Pros and Cons

When comparing NFO and IPO, there need to be weighed all such benefits and drawbacks that this process will bring with.

Pros of investing in NFOs:

• Novel Strategy: NFOs provide an opportunity to pursue a new investment strategy wherein you can benefit from still-emerging trends.

• Priced at Fixed Prices: Units are normally at fixed prices, say like ₹10, thereby saving one from the vagaries of pricing with the initial investment amount fixed.

• Diversification Benefits: Most NFO's have been sectoral-specific or theme-based wherein opportunities for diversification exist

Cons of investing in NFOs

• No Track Record: NFOs have no past track record. Therefore, the potential gains cannot be easily measured.

• Market Fluctuation: Even if there is a fixed upfront cost, the value of the fund can vary in light of the market

• Risks associated with Fund Manager: Success of NFO depends to a great extent on the skills of a fund manager.

Pros of investing in IPOs

• Early Investment: There is an opportunity for investors to invest in the growth of a company from an early stage.

• High Return Potentials: The best-listed IPOs can result in astronomical returns for their investors.

• Liquidity: After being listed, the shares can be easily bought and sold on the stock exchange.

Cons of investing in IPOs

• IPO Price Volatility: An IPO price is very sensitive to issues of market sentiment and demand.

• Risk of Loss: Investment in an IPO carries natural risks, including that a firm may not perform well.

• Overwhelming Information: Prospectus analysis and interpreting the financial statements of the company are indeed complex.

Key Differences Between NFO and IPO

While both NFOs and IPOs offer opportunities to invest in new ventures, they operate in different domains and have distinct characteristics. Here's a table summarizing the difference between NFO and IPO:

Understanding these key differences is crucial when deciding which is better, NFO or IPO, for your investment needs. Each option caters to different investment strategies and risk appetites.

Process of Investing in NFO vs. IPO

Although NFOs and IPOs signify investment in a new issue, the procedures followed for the two are a little different from each other. Here is how investing in NFO differs vs IPO:

Investment in NFO

1. Select an NFO: Select an NFO that satisfies your investment objective, risk profile, and the fund strategy. Study the Offer Document carefully.

2. KYC Compliance: Ensure that you are KYC compliant with a SEBI-registered intermediary.

3. Application: Apply to the NFO through a broker, an online trading platform, or directly to the AMC.

4. Payment: Pay for the units you prefer to invest in at an offer price.

5. Allotment: After the closing of the NFO, the units are allotted to the investors. You will receive an account statement reflecting your investment.

Investing in an IPO:

1. Select an IPO: Analyze the company's prospectus, financial performance, and growth potential. Consider market conditions and expert opinions.

2. Demat Account: Open a demat account with a depository participant to hold your shares electronically.

3. Apply through ASBA: Apply for the IPO through the application supported by blocked amount process. Here, you need to block the required amount in your bank account.

4. Bidding: Bid for the required number of shares within the specified price band.

5. Allotment: Shares will be allotted based on the demand and availability. In case you allot shares, those will appear in your Demat account.

NFO vs IPO: What Are the Risk Factors?

Both NFOs and IPOs carry some inbuilt risks that an investor should be aware of before they invest their hard-earned money.

NFO Risks

1. No Track Record: As NFO does not have any track record, it becomes tough to predict the probable returns as well as the capability of the fund manager who will execute the scheme.
2. Market Volatility: The price at which the investment was made is fixed, but the NAV of the fund will be constantly changing with the force of the market and performance of the investments.
3. Liquidity Risk: NFOs sometimes mean that there is inadequate liquidity, primarily in the initial period as it is difficult to either buy or sell units.

IPO Risks

1. Price Volatility: During the early trading days, IPO prices are very sensitive to market sentiment and speculative trading.
2. Company Performance: Long-term profitability after an investment in an IPO includes the performance of the company in executing the business plan designed and earning profits.
3. Overall Market Condition: Economic factors, the state of the market, and general industry trends tend to be the major driving factors of IPO performances.

Knowing these risks, however, can guide an individual in choosing which of NFO or IPO might work best for him/her according to his tolerance of risk and other objectives regarding financial matters.

Read this article to learn more about Is Investing in NFO a Good Decision?

Bottom Line

When choosing between NFO and IPO the "better" depends entirely on your individual financial goals, risk tolerance, and investment strategy in choosing between NFO vs IPO. NFO allows one to participate in a new fund with a particular approach to investment, and an IPO does so in allowing one the chance to invest early in a company's growth story. The two terms that it is imperative to understand and differentiate are NFOs and IPOs. Mutual funds provide a money basket of securities. IPO on the other hand, signifies buying shares of a specified company. These too involve their sets of risks along with their rewards.

Ultimately, proper research and adequate consideration of your investment objectives, along with the excellent understanding of market dynamics, are all crucial steps to make an informed choice between NFOs and IPOs.

Frequently Asked Questions

Can I invest in both NFOs and IPOs?

Yes, you can even invest in both NFOs and IPOs parallelly, provided you can meet the eligibility criteria of both and have the respective financial capacity to do both. Diversifying would be a prudent strategy sometimes.

What are the NFO and IPO costs associated with investing?

NFO Costs:

1. Expense Ratio: Mutual fund has a cost of funds that represents the expenses incurred by the fund for its working. This is an annual charge deducted from the assets.
2. Entry load: There are some NFOs with a member of an on-set / inception fee that one would pay upon investing into the fund.

IPO Costs:

1. Broker's charges: Broker charges a fee to assist in applying to an IPO.
2. DP charges: Charges for holding shares in DEMAT accounts.
3. SEBI Turnover Charges: SEBI charges a meager amount as a turnover charge on every security transaction.

Are the minimum investment amounts for NFOs and IPOs?

• NFOs: The minimum investment varies between one fund to another and varies with the AMC. It is as low as ₹1,000 or as high as ₹5,000 or more.
• IPOs: The minimum investment in an IPO is one lot, which is a fixed quantity of shares. The number of shares in one lot varies with the IPO.

What are some common myths about NFOs and IPOs?

1. Myth: NFOs are always offered at a discount.Fact: Although NFOs are often priced at a fixed price, usually ₹10, this does not necessarily mean it is a discount. The value of the fund can change after the launch depending on market performance.
2. Myth: All IPOs are profitable.Fact: IPOs are always risky. Not all IPOs do well, and some may even decline in value after listing.
3. Myth: Investing in NFOs is risk-free.Fact: NFOs are susceptible to market risks and the performance of the underlying assets. There is no assurance of returns.
4. Myth: Only high-net-worth people can invest in IPOs.Fact: One can find an avenue for investment in an IPO under any type of investment.

Read these articles to understand all about mutual funds, SIPs and how you can invest in mutual funds with Wright Research:

1. What is SIP in Mutual Funds? An Experts Guide

2. The Crucial Role of Risk Profiling in Mutual Fund Investments

3. How many funds should you have in your Mutual Fund Portfolio?

4. What is Standard Deviation in Mutual Fund and How Does it Help in Portfolio Management?

5. Online KYC for Mutual Fund Investments in India

6. Smallcase vs Mutual Fund: Understand Difference and Similarities
7. SIP Investment Guide: What is SIP, How to Start, Benefits, & Is It Worth It
8. Which One is the Better Option: Liquid Funds or Arbitrage Mutual Funds Instead of Fixed Deposits?
9. Understanding Mutual Fund Risks: A Comprehensive Guide for Investors in India
10. How To Invest In Mutual Funds in India?
11. SIP Investment Guide: What is SIP, How to Start, Benefits, & Is It Worth It
12. What is SIP in Mutual Funds? An Experts Guide
13. Is Investing in NFO a Good Decision?