As a beginner in the world of investing and finance, you might come across a lot of different terms. Some you might have heard of and some you didn’t. However, understanding such terms is important. To help you with the same, in this article, we are going to discuss two such terms: IPO and NFO and the difference between both.
What Is an IPO?
First up, let’s get to the mystery behind IPOs. IPO stands for Initial Public Offering. Did you know, around 57 corporates from India raised a total amount of Rs. 49,434 crores with main board IPOs in the year 2023?
Think of it as a “big opening” day for a company that goes public. When a company gets to the stage where it is ready to attract public investment for an initial ownership stake, ownership of the company’s shares is offered to investors for the first time through an IPO.
This is a big moment for the business because it means they’re transitioning from being privately owned to a publicly traded company.
What Is an NFO?
NFO stands for New Fund Offering for mutual funds. A fund manager invests it in various assets such as bonds and stocks. Sometimes, it is a mixture of both. In simpler terms, an NFO is when a mutual fund or an exchange-traded fund (ETF) launches for the first time, seeking investors who want to buy direct mutual funds.
Here is an interesting fact: The overall managed assets of the Indian Mutual Funds Industry was ₹9.16 trillion in February 2014, which increased to ₹54.54 trillion in February 2024, indicating a six-fold growth in just 10 years.
Difference Between IPO & NFO
So, what are the main differences between IPOs and NFOs? Let us learn about them:
- Nature of Offering: IPOs can be used by companies that want to raise capital by selling their shares to the public. On the other hand, NFOs are for investment funds looking to gather money from investors to kickstart their investment operations.
- Purpose: Companies go public through IPOs to raise funds for growth, expansion, or other business advantages. On the other hand, NFOs are launched to create a new investment opportunity for investors to partake in it.
- Risk and Return: Investing in IPOs can be riskier because it’s often for newer companies. These might have limited track records in the market. However, NFOs have different levels of risk which is dependent on the asset it affirms.
- Timing: IPOs tend to happen when a company decides it’s the right time to enter the stock market. NFOs are launched by fund houses when they believe there’s demand for a new investment product.
- Pricing: IPO shares are priced based on the company’s valuation, demand, and supply dynamics, often with the help of investment banks. NFO units, however, are usually offered at a fixed price during the initial subscription period.
- Liquidity: After you apply for IPO, shares get traded on the stock exchange and can be liquidated by investors at any time depending on their demand. NFO units, however, are allotted based on the subscription and can only be traded once the fund is listed on the exchange (in the case of ETFs) or after the NFO period ends for mutual funds.
- Demat Account: NFOs don’t need a demat account while the IPOs do.
Conclusion
Now that we’ve understood the distinctions between IPOs and NFOs, you are ready to take a step into the investing world. But, investing involves risks so it’s important to invest as per your goals and after considering your risk appetite. To invest in stocks or mutual funds, open an account with Dhan and start your journey.
