Sunday, November 27

What distinguishes a corporate IPO from a mutual fund NFO?

While many investors tend to confuse an NFO with an IPO, they couldn’t be more dissimilar.

First and foremost, an IPO is either a means of the firm raising new capital or a means of making a sale (OFS). An NFO, on the other hand, is for new fundraising, and there are no restrictions on the total amount that can be raised.

Second, there are distinct quotas for retail investors, NIIs, and QIBs in firm IPOs. Even further discounts are sometimes provided for retail investors in some IPOs. However, in the case of mutual fund NFOs, ordinary investors do not receive any such unique advantages.

The crucial component of IPO price is valuation based on the P/E ratio, EV/EBITDA ratio, and P/BV ratio. Since the money raised in an NFO is simply divided into units and put in the market, values are not a concern.

The way funds are used in an IPO will determine whether or not the money will provide value for the investor. In the case of NFO investment, the market’s level is more crucial because it will define the valuations at which the fund would invest.

Since a high-quality IPO attracts a higher valuation, the IPO price is a good indicator of the company’s perceived value. The majority of fund NFOs are released at a price of Rs. 10, but that is only an example. The point at which these funds join the market is important.

Depending on the demand, market circumstances, and news flow, an IPO may list at a price higher than the issue price or lower than the issue price. NFOs typically launch with a lower NAV since under an NFO the marketing, administrative, and other expenditures are deducted to the fund.

The forces of supply and demand ultimately determine the price of an IPO. Only the price range is predetermined; the real price is learned through book construction. The NFO just has an indicative unit value and has nothing to do with supply or demand.