IPO vs NFO: Which is better for investment - Basic difference, risk assessment
Investing in any fund or scheme involves some amount of risk. And when it comes to investing in securities, the risks are very high. But a deep understanding of the fund or scheme could help you minimize the risk and multiple your money many fold. Here we will discuss about two most lucrative investment options -- Initial Public Offering (IPO) and New Fund Offering (NFO).
Government and private companies need funds to expand their operations and therefore they turn to public investors to raise funds. There are two common ways a company can collect funds from the public investors. The options are IPO and NFO. It is often noticed that investors get confused between IPOs and NFOs as they presume that both offer similar opportunities for investment because they are primary market offerings. But both are no way similar to each other.
DIFFERENCE
An IPO is the FIRST offer made by a firm to the retail investors for subscription of its SHARES.
An NFO is an INITIAL offer of UNITS to retail investors in a mutual fund scheme that is just being launched by an asset management company.
Rachit Chawla, CEO & Founder, Finway FSC, said that when a company is going public, it offers shares for the first time to the general public in large. "It is called IPO," he said. NFO is related to a mutual fund or asset management company which is open for investment in a particular scheme at the time of the launching of a new fund.
Explaining which is better, Rachit said that it depends on the consumer whether the consumer has the appetite to take risk.
RISK
"If the person is ready to take the risk, investment in individual stocks is better. If the consumer doesn't has the appetite or know how skills risk mitigation for individual stocks then NFO is better because it is professionally managed by fund manager," he said.
"Passive investors should always look at NFOs whereas active investors should always study the companies that are available for IPOs. Of course, IPOs are more risky but the reward side is also far higher than NFOs. NFOs risk is low and reward is also significantly low as compared to IPOs," he added.
When a company brings its IPO, it is already in existence and engaged in operations, and therefore it gives investors an idea of the fundamental strengths and its performance.
However, in an NFO, investors have nothing to evaluate. Since the fund is new, it has no record which can be used to study its performance or growth. The role of the fund manager is crucial here. It is advisable to check who is the fund manager and his past performances to understand the approach.
It is also advisable the investing in an IPO if it is available at a price that is fair for consideration is anytime better than investing in an NFO. This is because that units allotted to an investor in a scheme will be lower than the NAV of similar schemes. Investing in an NFO is recommended only when it offers an investment opportunity that is not available currently.
