InvestorQ : How do IPOs and NFOs actually differ in the markets?
manisha Kolvenkar made post

How do IPOs and NFOs actually differ in the markets?

3 years ago

While the similarities between NFO and IPOs are quite fundamental, the differences are a lot more pronounced. Here are few such key differences.

In IPOs there is an important aspect of valuation since the P/E ratio and the P/BV ratio become relevant in case of IPO pricing. There is no question of valuations when it comes to an NFO since the amount collected is simply divided into units and invested in the markets.

When it comes to IPOs, the usage of funds is very important as that will determine whether the IPO money is going to add value to the investor. In case of NFOs, the level of the market is more important as it will determine at what valuations the fund will enter the markets.

IPO price is indicative of perceived value of the company since a quality IPO commands a better valuation and therefore a better price in the market. When it comes to NFOs, the price really does not matter. Most mutual fund NFOs come out at a price of Rs.10 but that is hardly material. What matters is at what levels these funds enter the market.

An IPO may list at a premium to the issue price or at a discount to the issue price depending on the perception of retail and institutional investors. However, once an NFO has raised the funds then it allocates the money to buying shares. However, since the marketing, administrating and other issue costs are debited to the fund, NFOs normally open with a NAV of less than Rs.10.

When it comes to IPOs, the investors are divided into retail, institutional and HNI categories with separate quotas for each of them and even a discounted price for retail investors. There is no such classification in case of NFOs.

Remember, when it comes to IPOs, they are a genuine attempt to raise capital or offer an exit route for original investors. An NFO is hardly different from an on-tap purchase of mutual fund units, except that it sold as an NFO. As an investor, IPOs could be more material and meaningful to you compared to NFOs.