How Does an NFO vary from an IPO?

Updated on :  

08 min read.

You might have come across news around several companies going public by launching their initial public offering (NPO). However, you may not have heard much about a new mutual fund scheme being launched by issuing a new fund offer (NFO). We have covered the following in this article:


What is an NFO?

Similar to an initial public offering (IPO), in which a company allows the public to invest in their operations for the first time, a mutual fund allows the public to invest in their pool for the first time through issuing the new fund offer (NFO). An asset management company (AMC) or fund house accepts public investments when it launches an NFO to purchase capital assets. 

The fund houses keep the NFO open only for a certain duration of time, and investors will be purchasing the fund units at the stipulated cost during this period. Generally, the issuing price of NFO would be Rs 10. Once the NFO closes, investors can purchase fund units at the prevailing net asset value (NAV) of the mutual fund scheme. More often than not, investors who invested in an NFO have enjoyed significant post-listing gains. 

Is investing in an NFO a good opportunity?

They say several little drops of water form an ocean. The same holds for a mutual fund scheme. When an NFO is launched, the price would most likely be Rs 10. Hence, an NFO would be much affordable as compared to a well-established fund. However, your investment decision should be well informed. 

Whether you are investing in an NFO or a well-established fund, you must invest in the fund only after ensuring that your objectives are being served and the fund’s risk levels fall under your risk tolerance. If not, you may not consider investing in an NFO. You have to read the document before investing carefully. 

How does an NFO differ from an IPO?

The following table shows the significant differences between subscribing to an NFO and IPO:

ParameterNFOIPO
Issued byFund housesCompanies
Indivisible unitFund unitShare
Pricing levelMostly Rs 10, irrespective of the underlying companiesIt is influenced by the fundamentals of the issuing company
Initial offeringWill be available for the public investment on the respective websites of the fund housesWill be available for subscription only through the recognised stock exchanges
Demat account requirementNot needed if you are not planning to hold your units in a dematerialised formHaving a Demat account is compulsory to sell share upon listing

Conclusion

An NFO to a mutual fund scheme is what an IPO is to stocks. If you are clear with the fund objectives and risk levels, you may consider investing in an NFO. 

Related Articles:

New Fund Offer : NFO of Mutual Funds

IPO – Process, How to buy Shares, Risks and Returns


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