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Published on 12/03/2020 11:02:05 AM | Source: Live Mint

Understand the difference between IPOs, NFOs to make the right investment choice

Posted in Top Stories| #IPO #Wealth

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Investors often get confused between initial public offers (IPOs) and new fund offers (NFOs) and presume that both represent similar investment opportunities. While both IPOs and NFOs are primary market offerings, you need to understand the difference between the two to make the right investment choice.

An IPO is the first offer made to the public for subscription of shares by a company, whereas an NFO is the initial offer of units made to investors in a mutual fund scheme that is just being launched. Here are the differences between the two on various parameters.

Performance

A company making an IPO is, typically, in existence and engaged in operations for a while before it makes an IPO and this gives prospective investors an idea of the fundamental strengths and past performance of the company before they invest.

In an NFO, investors have nothing to evaluate in terms of the scheme’s past performance. What they could do is look at the performance of the other schemes that the fund manager has managed and those of the fund house offering the NFO to understand the fund management philosophy and approach.

Pricing

The price at which shares are offered in an IPO is an important parameter since it considers the fundamentals of the company, the value that it has created in the past and the prospects for the future. It helps investors evaluate whether the shares are being offered at a premium or discount to its valuations. Shares that are seen as being offered at a discount see greater demand in an IPO.

On the other hand, the price at which units are offered in an NFO is the face value of the units and does not indicate the current value of the investment or scheme since there is no portfolio to evaluate. The scheme’s portfolio is created once the investors subscribe to the NFO.

Listing price

After an IPO, the price at which the shares list and trade on the stock exchange depends upon the perception of the market participants on the prospects of the company and its profitability.

The net asset value (NAV) of the scheme post-the NFO reflects the current market value of the securities held in the portfolio and it is not a value that reflects the expectation of how the portfolio will grow in the future.

What you should do

Invest in an IPO if it is available at a price that is fair considering the prospects for growth in the share value and at a price that is competitive relative to similar companies.

In case of an NFO, the fact that units are available at face value that is lower than the NAV of similar schemes is not a valid reason for selection over an established well-performing scheme. Consider investing in an NFO if it offers an investment opportunity that is not available currently, or if it is available, the existing schemes have not managed it well