NFO vs IPO : Difference, Risks, Which is better Investment

It is very common to read about Initial Public Offer (IPO) in the news. Many companies, big and small, go public by launching their IPOs and selling their shares to the general public. A New Fund Offer (NFO) is similar but in the context of mutual funds.

Let us dig deeper into what IPOs and NFOs are.

What is an IPO?

When a private company issues its shares to the public for the first time, it is called an IPO. It is when a company goes from being privately held to its shares now getting listed on stock exchanges and being available to be traded by the general public.

Companies either issue fresh equity to raise capital for expansion or existing shareholders in the company sell off their shares to the general public. Usually, it is a combination of the two.

What is an NFO?

Like an IPO, when a fund house launches a new mutual fund scheme and issues its units to the public for the first time, it is called an NFO.

The money raised by selling these units is used by the fund house to invest in the financial markets. It is invested in instruments like debt, equity, and any combination of the two, which depends on the kind of mutual fund scheme it is. You can choose a scheme that fits your risk appetite and financial goals.

Differences between IPO and NFO

Issued byPrivate companiesFund houses/asset management companies
CostAt the start of an IPO, a price range is set by the issuing company within which investors can bid.The allocation of shares happens based on set procedures that consider the number of bids received, bid prices, etcThe price of each unit is usually kept at Rs. 10.Once the NFO closes, the units then sell at the NAV of the fund, which in simple terms, is the value of the fund divided by total units
Requirement for dematerialised accountDemat accounts are required. The shares that you purchase are kept in your account in electronic formDemat accounts are not necessary. One can purchase units directly from the mutual fund company
How to buyOne can buy shares in an IPO by placing orders with their brokers that further place orders on exchanges.One can buy shares through the website of the offering fund house.

Pros and cons of investing in IPO and NFO

Historically, it is seen that both IPOs and NFOs have been beneficial for investors. NFOs allow you to invest in a mutual fund scheme at its inception at a nominal cost (units are usually sold for Rs. 10). You also get the regular benefits of a mutual fund scheme such as diversification, professional money management, etc.

IPOs let investors purchase shares at the very inception of a company’s listing. This provides new opportunities to invest.

Having said that, make sure to do your research while investing. In case of NFOs, pick a scheme based on your financial goals and risk appetite. Research the scheme well. In case of IPOs, invest in companies that have strong fundamentals that you believe can provide value in the future.