Difference Between IPO and NFO

Difference Between IPO and NFO

Initial Public Offering (IPO) is a process through which a company aims to seek funds from their investors to grow its business. To offer IPO scrips, several companies have to list themselves in the stock exchange of India.
From startup to reputable companies, every company has the right to launch an IPO. Usually, the entire IPO is being written by one or more investment banks on behalf of the company.
IPO has a strong impact on the company's holdings. The company's status changes from a private to publicly owned company in the stock market exchange when the company offers an IPO to all the investors.

    IPO's is majorly used for three purposes:

  • To accumulate capital for the company
  • To liquidate shares of founders, private equity investors, and promoters
  • To enable easy trading of future capital or existing holdings by becoming publicly traded.

Once the shares are launched, they are available in the public market just like regular shares are traded.
When it comes to pricing and violation, IPO is a lot more different than NPO. Based on the company's market capitalization, the price of an IPO is decided.
The company's valuation is measured by the price to book and price-to-earnings to determine the offer's attractiveness and the listing price of the IPO.

Several investors get confused about NFO and think of it as an IPO. However, NFO is a new fund offering where Asset Management Company (AMC) announces a new scheme to accumulate a capital from the public.
The money gathered is used by the AMC to buy several financial securities like bonds and equity. During the new fund offer, the new mutual fund schemes are launched by these companies.
AMC offer NFO for a particular time, and only investors have the opportunity to grab them at a certain stipulated price during this period called the offer price.
In this period, investors purchase major units of the mutual fund scheme at an offer price to subscribe to the NFO fixed at RS 10.
After the expiry of the tenure, the investors can purchase the units the offer. However, it is said that the subscribers of NFO have achieved major gains after listing. Once the period of NFO is finished, investors will get their funds at the commanding Net Asset Value (NAV) of the fund.

IPO is the initial offer made by the company to the public for a subscription of its shares. In comparison, NFO is the first offer of units in a mutual fund scheme just launched and shown to the investors.
Let us look at the difference between NFO and IPO on three parameters:

  • Pricing
  • Pricing is an essential parameter since it is based on the company's value of past and future prospects and the company's fundamentals.
    The price at which shares are offered helps the investors determine whether they are offered a discount or premium to its valuations.
    Shares that are offered at a discount rate has greater demand in an IPO. On the other hand, in NFO, the units offered are the face value of the unit. Therefore, these units do not show the actual value of the investment.

  • Performance
  • A company creating an IPO is in existence and typically engaged in several operations before stepping into an IPO.
    This helps the investors get a clear idea about the company's past performance, strength, weakness, and market capitalization before planning to invest.
    Whereas, in NFO, the investors do not get to see the company's past performance and other measures to evaluate a company.
    They could only look at the performance of other several schemes managed by the fund manager and fund house that are offering NFO to get a clear understanding of the approach and philosophy of the fund management.

  • Listing price
  • Once the IPO is over, the price of shares at which they are listed and traded on the stock exchange depends upon the judgment of the market people on the profitability and prospects of the company.
    On the other hand, the Net Asset Value (NFA) of the scheme in the NFO reflects the securities of the recent market value held in the portfolio.

  • Usage of Funds
  • In IPO, the funds raised by a particular company is used for several business purposes like repayment of debts, expansion of the company, or to lower the stake of promoters in the company.
    NFO is launched where fund managers lift all the funds to invest in securities and funds. The primary objective behind raising funds is to capitalize on a trending theme of investment.

  • Listing
  • IPO is listed in the stock exchange above or below the decided price band. Therefore, if the price rises up on the listing day, investors can easily secure a good profit.
    In NFO, the fund is gathered at the start and then it is invested based on the Net Asset Value (NAV), which can be below or above the face value.

  • Valuation
  • The valuation of a company entirely depends on the performance, company's value and more. Whereas in NFO, the total fund is split and invested in the form of units.

  • Risk
  • The risk involved in IPO is an internal risk that can be exposed to the stock market. Whereas in NPO, the risk appetite is medium to low and considered ideal for all the investors.

  • What do you mean by IPO?
  • Initial Public Offering (IPO) is a process through which a company aims to seek funds from their investors to grow its business. To offer IPO scrips, several companies have to list themselves in the stock exchange of India.

  • What do you mean by NFO?
  • NFO is a new fund offering where Asset Management Company (AMC) announces a new scheme to accumulate a capital from the public.

  • What is the major difference between IPO and NFO?
  • The major difference between IPO and NFO is that shares are offered at a discount rate has a greater demand whereas, in NFO, the units offered are the face value of the unit. Therefore, these units do not show the actual value of the investment.