InvestorQ : What is a better option; equity IPO or a mutual fund NFO?
manisha Kolvenkar made post

What is a better option; equity IPO or a mutual fund NFO?

3 years ago

There has been a certain degree of romance to the whole idea of new issues. Of course, in case of equities we refer to them as IPOs while in case of mutual funds we refer to them as NFOs. Both Initial Public Offerings (IPOs) and New Fund Offerings (NFOs) result in raising money from the public. But, have you ever wondered what are the differences and the similarities between IPOs and NFOs. But first, the concept of IPOs and NFOs in much greater detail!

When a company wants to raise money from the public it is referred to as an IPO. Remember, there are two kinds of categories of IPOs. Firstly, there are the Fresh Issues where the company in question is raising funds in the market. This fund-raising could be for expansion, diversification, repayment of high cost loans etc. Secondly, there is the Offer-for-Sale, wherein the promoters or the anchor investors offload a part of their stake through the IPO. In this case, the company’s capital does not get diluted as the funds raised entirely goes into the hands of the investors who are offloading these shares.

NFOs are launched by mutual fund houses that are looking to launch new fund ideas in the market. Normally, NFOs tend to be concentrated around market peaks. For example during the peak of 2000 we saw a large number of Technologies and media related NFOs that were launched. Similarly, in 2007-08, most IPOs pertained to infrastructure and metals. NFOs, essentially, try to ride the hot trend in the market and enable the fund in question to increase its AUM. Of course, a lot of these NFO ideas could get constrained after SEBI has passed the new MF regulations on categorization of funds in the Indian context.