How Does an NFO vary from an IPO?

IPOs and NFOs are two different paths in the world of Markets. One helps businesses while the other helps people like you grow their savings by investing in the businesses. They sound complicated, but they’re just ways to collect money for big goals. In this article, let's understand what IPOs and NFOs are, how they work in India, why they matter, and how they differ.

What is Meant by an IPO

IPO stands for Initial Public Offering. An IPO is when a company invites everyone to own a piece of it. To understand it better, let’s assume Priya has a Kulfi stall.

Priya’s Kulfi stall is a hit in her neighbourhood. People love her creamy mango and pista kulfis, and she’s saving every rupee she earns. But her dream is bigger than her savings. She wants to open kulfi shops in every major city and maybe even sell frozen kulfis in supermarkets. To do this, she needs lakhs or crores of rupees for new freezers, a factory, and delivery trucks. Where will she get all that money?

This is where an IPO comes in. An IPO is like Priya putting up a big sign that says, “Want to own a piece of my kulfi business? Give me money, and I’ll share my company with you!” She sells tiny pieces of her business, called shares, to people across India. Each share is a small slice of ownership. If you buy a share, you own a tiny part of Priya’s Kulfi company, and she gets your money to grow her business.

What is Meant by NFO

NFO stands for New Fund Offering when an AMC launches a new mutual fund. While IPOs are about owning a piece of one company, NFOs are about growing your savings by pooling money with others. Think of it like a giant piggy bank for everyone. A mutual fund is like a big basket in which lots of people put their money. A clever person, called a fund manager, takes that basket and buys things like shares, bonds, or gold to grow the money.

Now Imagine you’re a teacher in Bengaluru. You’ve saved ₹50,000 and want to grow it for your daughter’s college fees in ten years. You don’t know much about stocks, and picking companies like Priya’s Kulfi business feels risky. What if you could give your money to a smart person who invests it for you in lots of companies? That’s what an NFO is about.

How Does an IPO Work in India?

Here’s the step-by-step process, explained as simply as a recipe for kulfi.

1. Priya Decides to Go Big: Priya realises her kulfi stall could become a national brand, but she needs crores of rupees. She decides to go public, which means allowing anyone to invest in her company by purchasing its shares.
2. Split the Business into Shares: Priya determines the worth of her business—let’s say ₹10 crore (100 million rupees). She divides it into one crore shares, each valued at ₹100. These shares are like tiny pieces of her company’s worth.
3. Get Help from Experts: Going public is a significant step, so Priya hires a merchant bank to guide her. The bank assists her in adhering to the rules set by the Securities and Exchange Board of India (SEBI), which ensures fairness for investors. The bank also prepares a document called a prospectus (DRHP, RHP), a report card detailing Priya’s business, including how much kulfi she sells, her profits, and her future plans.
4. Sell Shares to the Public: Priya’s shares are made available for sale through a stock exchange, such as the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE), which function as vast online marketplaces for shares in India. People across the country can purchase shares using a Stock broking app, such as a businessman in Kolkata, a teacher in Chennai, or a shopkeeper in Jaipur. Let’s say Priya sells 50 lakh shares at ₹100 each. That’s ₹50 crore in her company's hands.
5. Use the Money to Grow: Priya uses the ₹50 crore to buy a factory, hire more workers, and open new Kulfi outlets across the nation. Her business started growing because of the money she raised for her business expansion.
6. Shareholders Hope for Success: The people who bought shares now own part of Priya’s company. If her Kulfi shops do well, say, her company’s doubles, each share might be worth ₹200. Shareholders can sell their shares on the stock exchange to make a profit. But if Priya’s business struggles the shares might drop to ₹50 also, and people lose money.

How Does an NFO Work in India?

1. A New Fund is Created: An AMC like HDFC Mutual Fund or SBI Mutual Fund says, We’re starting a new fund where It’ll invest in tech companies, or maybe government bonds, depending upon the category of the fund. They call this an NFO.
2. Invite People to Join: The company advertises the NFO, saying anyone can put in money starting as low as ₹500 or ₹1,000 at the starting NAV of ₹10. They share a plan called a scheme information document explaining what the fund will buy and how it’ll grow your money.
3. People Add Money: Assume people like You, Ravi, decide to put ₹10,000 in the NFO. Your neighbour might add ₹5,000, and a businesswoman in Delhi might add ₹1 lakh. All the money goes into the same fund’s basket.
4. Fund Manager Invests: The fund manager, who’s like a chef mixing ingredients, takes the crores of rupees collected and buys a mix of investments. Maybe they buy shares of Reliance, Infosys, and Tata Motors, plus some bonds for safety and keep some cash for liquidity.
5. You Hope for Growth: If the investments do well, say, the tech companies grow, the value of the fund goes up. Your ₹10,000 might become ₹15,000 in a few years. But if the market falls, it could drop to ₹8,000. You can sell your share of the fund called units anytime or keep it for the long term.

Why Do Indian Companies Do IPOs?

In India, companies use IPOs to raise money for their company requirements. Here are some common reasons.

• Expand of Business: Like Priya wanting more kulfi shops, companies use IPO money to open factories, launch new products, or enter new cities. For example, Zomato used its 2021 IPO money to grow its food delivery network across India.
• Pay Off Debts: Some companies owe money to banks. IPO funds can help them clear those loans, like wiping a slate clean.
• Make Owners Rich: If Priya and her family started the Kulfi stall, an IPO would let them sell some of their shares and pocket crores while still running the business.
• Get Famous: Going public puts a company in the news. Assuming a company did its IPO, everyone started talking about its business models and products, which helped attract more customers.

Why Do Companies Launch NFOs in India?

Mutual fund companies launch NFOs to:

• Offer New Ideas: AMC tries to capture the latest market trends via NFOS, like electric cars or artificial intelligence. For example, ICICI Prudential launched an AI-focused NFO in 2024.
• Attract Investors: NFOs often start at ₹10 per unit, which feels affordable for new investors hoping the NAV will grow over the years and draw crowds.
• Grow Their Business: Fund companies earn a small fee called an expense ratio for managing your money. More AUM means more fees.

India’s IPO Boom

India’s stock market has been buzzing with IPOs in recent years, like a festival of new businesses. In 2024 alone, over 80 companies went public, raising more than ₹1.5 lakh crore (about $18 billion). India’s economy is growing fast think of it like a train speeding up. More people are earning money, shopping online, and investing in stocks. Companies see this and want to grab the chance to grow.

Here are some blockbuster Indian IPOs in recent times:

• Zomato (2021): This food delivery company raised ₹9,375 crore to expand its services. Its shares soared as more Indians ordered biryani and pizza online. Now, it has become part of NIFTY 50 within 4 years of listing.
• LIC (2022): The Life Insurance Corporation of India, a government-owned giant, raised ₹21,000 crore in one of India’s biggest IPOs ever. It was like inviting every Indian to own a piece of a trusted name.
• Hyundai Motor India (2024): The carmaker raised ₹27,870 crore to build more factories in India, making it the country’s largest IPO to date.

India’s NFO Craze

India’s mutual fund industry is booming, like a monsoon bringing new growth. In 2024, over 50 NFOs were launched, raising ₹70,000 crore. More Indians are investing over four crore people now own mutual funds, up from 1 crore a decade ago. Some popular NFOs in India include:

• SBI Automotive Opportunities Fund (2024): This NFO focused on car and battery companies, raising ₹5,710 crore, as electric vehicles have become a trend in the NFO market for some time.
• HDFC NIFTY200 Momentum 30 Index Fund (2024): This fund tracks top-performing stocks and raised ₹3,000 crore from small investors.
• Mirae Asset Hang Seng TECH ETF Fund of Fund (2021): This NFO invested in Chinese tech giants, showing how NFOs can go global.

Risks of Investing in IPOs 

IPOs are exciting, but they’re not like buying a guaranteed ticket to riches. Here are some risks for investors such as.

• Business Might Struggle: If Priya’s Kulfi company faces problems like high costs or bad weather ruining milk supplies, her shares could lose value. 
  For example, Paytm’s IPO in 2021 was hyped, but its shares crashed after losses piled up.
• Market Swings: India’s stock market can be like the weather sunny one day, stormy the next. Even good company shares can fall if the market crashes like during COVID-19 in 2020.

Risks of Investing in NFOs

In some ways, NFOs are safer than IPOs, but they’re not totally risk-free.

• No Track Record: Unlike older mutual funds, NFOs are new, so you can’t see how they’ve done in the past. It’s like trusting a new chef without tasting their food.
• Market Risks: A good fund can lose value if the stock market crashes (like in 2020). For example, many equity NFOs struggled during COVID-19.
• Fees: Some NFOs charge high fees (high expense ratio), which eat into your returns over time. SEBI caps fees, but you should also check before investing.
• Hype Can Mislead: Sometimes, companies look amazing during NFOs because of big ads or news. But later, you might find they’re not as strong. SEBI tries to protect investors, but you still need to read the prospectus carefully.

Benefits of IPOs

Despite the risks, IPOs are popular in India because of these reasons.

• Possibility of Big Returns: If you buy shares of a great company early, like Tata Technologies in 2023, you could double your money in months.
• Owning Cool Brands: IPOs let you own part of companies you love, like Tata, Waaree or Bajaj Housing Finance.
• Helping India Grow: When you invest in IPOs, you’re giving money to businesses that create jobs and build India’s future.

Benefits of NFOs

NFOs are loved in India because

• Low Entry Point: You can invest in NFOs with ₹500, unlike IPOs, where you might need around ₹15,000 for a single lot.
• Diversification: Your money is spread across many companies, reducing risk. If one company fails, others might do well.
• Professional Help: Fund managers do the hard work of picking investments, so you don’t need to study stocks.
• Flexibility: You can invest monthly through a SIP (Systematic Investment Plan) or Lumpsum, making it easy for salaried people.

How To Apply For IPO

Joining an IPO in India is easier than ever, thanks to technology. Here’s how it works.

1. Open a Demat Account: This is like a bank account for shares. Apps like Zerodha, Groww, or Angel One let you open one in minutes.
2. Apply for the IPO: When a company announces an IPO, you apply through your bank’s ASBA (Application Supported by Blocked Amount) system or your trading app. You say how many shares you want, and the money stays blocked in your account until shares are allotted or you can proceed with UPI as supported by your stockbroker.
3. Allotment: If the IPO is oversubscribed, not everyone gets shares, it’s like a lottery. The Registrar decides fairly.
4. Trade Shares: Once the company lists on the BSE or NSE, you can sell your shares or hold them for the future, it's totally your choice.

How To Invest In NFOs

Joining an NFO is as simple as ordering food online nowadays

1. Choose the Fund: Read about the NFO on the AMC’s website Check what it invests in stocks, bonds, gold and its goal.
2. Open an Account: You need a bank account and KYC (Know Your Customer) done. Most apps like Groww, Zerodha, and Upstox handle this digitally.
3. Invest Money: Pay through net banking or UPI. You can invest a lump sum or start a SIP in that NFO.
4. Get Units: If the NFO’s unit price is ₹10, your ₹1,000 gets you 100 units. As the fund grows, those unit’s value changes.
5. Track Your Investment: Use your Brokerage app to monitor your investment. You can sell units anytime or hold them for years.

IPO vs. NFO How Are They Different?

Now that we know how IPOs and NFOs work let’s compare them like choosing between Kulfi and ice cream. They’re both sweet but different in taste!

What You’re Buying

• IPO: In IPO, you buy shares of one company, like Priya’s Kulfi business. You’re betting on that company’s success. If Priya does well, your shares grow. If she fails, you lose.
• NFO: You buy units of a mutual fund, which invests in many companies or assets (stocks, bonds, gold). You’re spreading your money, so one company’s failure hurts less.

Example: In 2024, buying Swiggy’s IPO meant owning part of Swiggy’s food delivery business. Investing in SBI Automotive NFO meant owning a slice of many car companies like Maruti and Tata Motors.

Purpose

• IPO: Helps a company raise money to grow. Priya uses your money to build kulfi shops. You hope her success makes your shares valuable.
• NFO: Helps you grow your savings. The fund manager uses your money to invest wisely, aiming to make your ₹10,000 into ₹20,000 over time.

Example: Bajaj Housing Finance’s IPO (2024) raised ₹6,560 crore to lend more home loans. Nippon India Small Cap Fund’s NFO (earlier years) collected money to invest in small companies for your profit.

Risk Level

• IPO: This is riskier because you’re tied to one company. If Swiggy loses customers to Zomato, its shares could crash. India saw IPOs like Reliance Power (2008) drop 50% after the hype faded.
• NFO: Usually safer because your money is spread across many investments. Even if one company in the fund fails, others might balance it out. But if the whole market falls (like during the 2008 global crisis), NFOs can still lose value.

Example: LIC’s IPO investors faced losses when shares dipped post-listing. HDFC Equity Fund (an older NFO) survived market dips by diversifying.

Who Runs It

• IPO: The company’s leaders (like Priya) use the money and run the business. You trust their skills to grow the company.
• NFO: A professional fund manager decides where to invest your money. You trust their expertise to pick winners.

Example: Nykaa’s IPO depended on its CEO Falguni Nayar’s vision. Axis Bluechip Fund’s NFO relied on its manager’s stock-picking skills.

How You Got Allotted

• IPO: You apply during a short window (usually 3-5 days) through a bank or trading app. If oversubscribed, you might not get shares. In India, retail investors get a reserved quota.
• NFO: You invest during the NFO’s offer period (a week or two). Everyone who applies gets units; no lottery is needed. Post-NFO, you can still invest, but it’s not called an NFO anymore.

Example: Tata Technologies’ IPO (2023) was oversubscribed 69 times, so many missed out. Mirae Asset NFOs accept all investors during the offer.

Returns Potential

• IPO: This can yield huge returns if the company skyrockets. Tata Technologies shares jumped 140% on listing day. But losses are common, too. Paytm fell 60% in a year.
• NFO: Returns are steadier because of diversification. Top equity NFOs in India average 12-15% yearly over a decade, but short-term dips happen.

Example: Zomato’s IPO gave early investors 80% gains in months. Parag Parikh Flexi Cap Fund (from an older NFO) grew steadily at 18% annually.

Cost to Start

• IPO: You need enough money for a “lot” (e.g., 50 shares at ₹300 each = ₹15,000). Some IPOs, like Hyundai’s, required ₹2 lakh for high-net-worth investors.
• NFO: You can start with ₹500 or ₹1,000, making it easier for small savers like students or shopkeepers.

Example: Swiggy’s IPO lot size was ₹14,000 minimum. SBI Balanced Advantage Fund NFO let you start with ₹500.

Time Horizon

• IPO: Shares can be sold the day they list (usually a week after the IPO closes). Great for quick traders but risky if you hold too long.
• NFO: Mutual funds are for patient investors. Equity NFOs shine over 5-10 years, as markets grow. Selling too soon might mean losses during dips.

Example: Bajaj Housing IPO investors sold for 50% gains on day one. ICICI Prudential Value Discovery Fund (NFO from 2004) grew 20x over 20 years.

Why IPOs and NFOs Matter in India

IPOs and NFOs are like two sides of India’s growth story one builds businesses, the other builds wealth for people. Let’s see why they’re a big deal.

India’s Booming Financial Market

India’s economy is like a rocket taking off. With 1.4 billion people and a GDP growing at 6-7% yearly, it’s one of the world’s fastest-growing nations. More Indians are earning, spending, and saving. This creates a perfect stage for IPOs and NFOs:

• IPOs Fuel Growth: Companies need money to match India’s demand. Whether it’s Ola Electric building EV scooters or Swiggy delivering food faster, IPOs give them the cash to create jobs and products. In 2024, IPOs created thousands of jobs by funding expansions.
• NFOs Grow Savings: As Indians earn more, they want to invest. Mutual funds have grown from ₹10 lakh crore in 2014 to ₹60 lakh crore in 2024. NFOs make it easy for everyone farmers, teachers, or IT workers to join the wealth-building party.

Empowering Regular Indians

Both IPOs and NFOs let everyday people be part of India’s success:

• IPOs: You can own a piece of brands you use daily, like Jio or Boat. When Zomato went public, delivery riders and customers bought shares, feeling proud to own a company they helped grow.
• NFOs: They’re like a ladder to financial freedom. A rickshaw driver in Lucknow can invest ₹1,000 in an NFO and watch it grow over years, beating inflation (which makes things costlier).

Government and SEBI’s Role

India’s government and SEBI make sure IPOs and NFOs are safe and fair:

• For IPOs: SEBI checks every prospectus to ensure companies tell the truth about profits and risks. They also reserve 35% of IPO shares for retail investors (people like you), so big players don’t grab everything.
• For NFOs: SEBI ensures funds explain their plans clearly and cap fees (usually 1-2% yearly). They also push for investor education, so you understand what you’re buying.

Challenges in India

Despite the excitement, there are hurdles:

• IPOs: Some companies overhype their IPOs, leading to crashes. Paytm’s 2021 IPO disappointed many when losses grew. Plus, not all Indians have demat accounts only 12 crore in a nation of 140 crore.
• NFOs: Many Indians still think mutual funds are risky or don’t know about them. Rural areas lack financial literacy, and some NFOs underperform if managers make poor choices.

Real-time Stories from Famous IPOs and NFOs

Let’s look at two stories, one IPO and one NFO, to see how they work in real life.

IPO Story: Zomato’s Rise (2021)

Zomato, India’s food delivery giant, was once a small startup. By 2021, it wanted to grow bigger add more restaurants, deliver faster, and maybe start grocery services. It launched an IPO to raise ₹9,375 crore. Here’s what happened.

• The Buzz: Every news channel talked about Zomato. Young Indians, especially Gen Z, rushed to open demat accounts. The IPO was subscribed 38 times people applied for 38 shares for every one available!
• Listing Day: Shares listed at ₹116, up from the IPO price of ₹76, giving instant 50% gains. If you invested ₹15,200 for a lot, it became ₹23,200 in a day.
• Aftermath: Zomato used the money to expand, but its shares swung wildly hitting ₹160, then dropping to ₹40 in 2022 during losses. By 2024, it was back to ₹200 as profits grew. Early investors who held on made big money, but many who panicked lost.

Lesson: IPOs can be a rollercoaster. Patience and research matter.

NFO Story: Parag Parikh Flexi Cap Fund (2013)

In 2013, Parag Parikh Mutual Fund launched an NFO called the Flexi Cap Fund, aiming to invest in strong Indian and global companies. It raised ₹600 crore initially. Here’s the journey:

• The Plan: The fund promised to pick quality companies like HDFC Bank and Google, mixing Indian and foreign stocks for safety and growth.
• Investor Response: Middle-class families, IT professionals, and retirees invested, starting with ₹5,000 or ₹10,000. The NFO’s ₹10 unit price felt affordable.
• Growth: By 2024, the fund’s value grew at 18% yearly. If you invested ₹10,000 in 2013, it became ₹60,000 by 2024. Even during COVID, the fund dipped less than others because of smart picks.
• Why It Worked: The manager’s focus on quality and diversification saved the day. Investors who stayed for 10 years beat inflation and bank FDs.

Lesson: NFOs reward patience and trust in professionals.

Tips for Choosing Between IPOs and NFOs

Not sure whether to pick an IPO or NFO? Here’s advice, like choosing between cricket and kabaddi:

1. Know Your Goal:
2. Check Your Budget:
3. Understand Risk:
4. Think Long-Term:
5. Learn from India’s Market:
6. Use Technology:
7. Talk to Experts:

The Future of IPOs and NFOs in India

India’s financial market is like a river: always flowing and always changing. What’s next for IPOs and NFOs?

IPO Trends

• Tech and Startups: As India's digital economy grows, more startups like Ola Electric, Flipkart, and Byju will go public (once they started recovering).
• Green Energy: With India aiming for net zero by 2070, companies in solar, wind, and EVs (like Tata Power) will launch IPOs.
• Retail Rush: As more Indians open demat accounts (assuming 20 crore by 2026), IPOs will see crazy demand, but SEBI might tighten rules to avoid crashes.
• Global Interest: As India becomes a global hub, foreign investors are eyeing Indian IPOs, like Hyundai’s.

NFO Trends

• Thematic Funds: NFOs focusing on AI, healthcare, and ESG (environment-friendly) investments will grow. Aditya Birla Sun Life’s ESG Fund is a sign of this.
• Passive Funds: Low-cost NFOs tracking indices like NIFTY 50 or Sensex are hot, as they beat many active funds.
• Rural Reach: Mutual funds are targeting small towns with ₹100 SIPs, growing the investor base to 10 crores by 2030.
• Digital Push: Apps and UPI will make NFOs as easy as buying groceries, with robo-advisors suggesting funds.

Challenges Ahead

• Education Gap: Many Indians, especially in villages, don’t know about IPOs or NFOs. Schools and apps need to teach money basics.
• Market Volatility: Global issues (like US tariffs or oil prices) could shake India’s market, hitting IPOs and NFOs.
• Scams: Fake advisors or overhyped IPOs/NFOs could trick new investors. Stick to SEBI-registered platforms.

Things to remember

• Start Small: Try an NFO with ₹1,000 or an IPO with spare cash.
• Learn First: Read about the company or fund. Ask questions.
• Be Patient: Wealth grows like a mango tree slowly but sweetly.
• Stay Safe: Use trusted apps and avoid “get rich quick” promises.

Conclusion

IPOs and NFOs are like riding a bike in a mountain road. IPOs let you own a piece of exciting companies whether it’s Priya’s kulfi empire or giants like Reliance. They’re risky but thrilling, like riding a bike on a busy road. NFOs are like a steady train ride, growing your savings safely with the help of experts. They’re perfect for building wealth without stress.