Illustration: Binay Sinha
As India’s financial markets evolve, investors are looking for the best avenues to grow their wealth. Two popular investment options are Initial Public Offerings (IPOs) and New Fund Offerings (NFOs). Both cater to different investment strategies and different levels of risk tolerance.
Understanding NFOs and IPOs
NFOs and IPOs are two different methods of raising capital. An IPO allows a company to go public by making shares of a company available to the public. It also allows a company to increase its shareholder base and attract new investors.
On the other hand, an asset management company (AMC) may introduce a new scheme called New Fund Offer to raise money from the public for investing in financial instruments such as stocks and bonds. Investors can buy mutual fund units during the short New Fund Offer period at a fixed offer price of Rs 10. After the New Fund Offer period is over, units can be purchased at the prevailing Net Asset Value (NAV) of the fund.
Key differences between IPOs and NFOs
IPO
It aims to raise capital for a company, allowing it to expand its operations or provide liquidity to existing shareholders.
Investors purchase shares directly from a company, which exposes them to the specific risks and rewards associated with it.
Requires a demat account to trade stocks, which may deter some potential investors.
NFO
Designed to raise capital for a mutual fund scheme, enabling professional management of a diversified portfolio.
Investors buy units of a mutual fund and spread their risk across a range of professionally managed assets.
Accessible without a demat account, making it easy for novice investors to participate.
“Though NFOs are not as popular as IPOs, both serve different purposes. IPOs help investors subscribe to the company’s shares directly and help in getting instant gratification if the company is listed at a premium,” said Amar Ranu, head of investment products and insights at Anand Rathi Shares and Stock Brokers.
“However, due to oversubscription in most NFOs at present, the chance of getting subscription is very low. Unlike direct stocks, which carry higher risk, NFOs help in subscribing to new funds that are more diversified and are a pool of assets, and help in reducing risk. From an investor perspective, NFOs are preferable as they are more diversified, carry lower risk and help in generating consistent returns over a long period of time,” Ranu said.
First published: August 22, 2024 | 15:57 IS
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