What distinguishes a mutual fund NFO from an IPO?

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While many investors confuse an NFO with an IPO, the two are as dissimilar as cheese and chalk.

First and foremost, an IPO is either a new round of funding for the firm or an offer to sell the company’s stock (OFS). An NFO, on the other hand, is for new fund raising, and there are no limits to the amount of money that can be raised.

Second, quotas for individual investors, NIIs, and QIBs are separate in company IPOs. Some IPOs even provide a bonus discount to individual investors. In the case of mutual fund NFOs, however, there are no such specific incentives for retail investors.

The essential part of valuation in IPOs is the P/E ratio, EV/EBITDA ratio, and P/BV ratio, which are used in IPO pricing. An NFO does not require appraisal because the funds collected are simply divided into units and invested in the market.

The use of funds in an IPO is critical since it determines whether the IPO money adds value to the investor or not. In the case of NFO investment, the market level is more crucial because it determines at what valuations the fund would invest.

Because a quality IPO attracts a higher valuation, the IPO price reflects the company’s perceived value. When it comes to NFOs, most fund NFOs are priced at Rs.10, although this is only suggestive. What is important is the level at which these funds join the market.

Depending on demand, market conditions, and news flows, an IPO may list at a premium or a discount to the issue price. However, in an NFO, marketing, administrative, and other expenditures are deducted from the fund, therefore NFOs often begin with a lower NAV.

Finally, the IPO price is determined by supply and demand dynamics. Only the price range is known in advance, and the precise price is discovered during book construction. The NFO has no bearing on demand or supply, and it just has an indicative unit value.