IPO vs NFO: How to decide which is a better investment option for you

Determining whether an IPO or NFO is better for investment depends largely on individual financial goals and risk tolerance

As India's financial markets evolve, investors are seeking the best avenues to grow their wealth. Two popular investment options in focus are initial public offerings (IPOs) and new fund offers (NFOs). The two cater to different investment strategies and risk appetites.

 

Understanding NFO and IPO

 

NFOs and IPOs are two distinct methods of raising capital. An IPO allows a firm to become listed by making shares of a stock available to the public. Additionally, it enables a business to grow its shareholder base and draw in new investors.

 

Conversely, an asset management company (AMC) may introduce a new scheme called a New Fund Offering to raise money from the public for the purpose of investing in financial instruments like stocks and bonds. Investors can buy mutual fund units during the short NFO period for a set offer price of Rs 10. After the NFO period ends, the units can be purchased at the prevailing Net Asset Value (NAV) of the fund.

 

Key differences between IPOs and NFOs

 

IPO

 

Aimed at raising capital for a company, allowing it to expand operations or provide liquidity for existing shareholders.

 

Investors buy shares directly in a company, exposing them to the specific risks and rewards associated.

 

Requires a demat account for trading shares, which may deter some potential investors.

 

NFO

 

Designed to raise capital for a mutual fund scheme, enabling professional management of a diversified portfolio.

 

Investors purchase units of a mutual fund, spreading their risk across a range of assets managed by professionals.

 

Accessible without a demat account, making it easier for novice investors to participate.

 

“Though NFOs are not as popular as IPOs, both have separate purposes. IPOs help investors in subscribing to the company’s shares directly and help in instant gratification if it lists at premium," said Amar Ranu, head - investment products & insights at Anand Rathi Shares and Stock Brokers.

 

"However, due to over subscription in most NFOs these days, the chance of getting the subscription is very dim. In contrast to direct stocks, which carry a higher risk, NFO assists in subscribing to new funds that are more diversified and a pool of assets and helps to reduce risk. From the perspective of investors, NFOs are preferable since they are more diversified, carry lower risk, and contribute to steady returns over an extended length of time, ” said Ranu.