IPO Vs NFO???

Let’s understand about investments. Two most famous ways of investing among the investors. First, mutual funds second, Equities or share market. We go to a mutual fund or buy shares from the share market. But we rarely know what was their journey is. For example, if we talk about Reliance’s shares. I wouldn’t know how it first came to the market. Similarly, if we talk about mutual funds, we know that its NAV is but we don’t know how it started. Come on let’s look into the journey when stock come to the market for the first time, how their price is decided and what is meant by IPO. Similarly, when mutual funds are launched for the first time in the market, what is it called, how does it work?

IPO - Initial Public Offering (Share market)

When a company comes to the market for the first time, and raises money from the public then it have to launch an IPO. But which is that stage when a company feels that it should launch an IPO? When companies start, they expand gradually so they need some capital for expansion. A company can raise capital from different places like banks, Private investors. At some point, the company might feel that it should raise money from public at that moment they may launch an IPO.  Before an IPO is launched, investment banks would do a valuation of the company. Assume that an investment bank did a valuation of a company at 1000 rupees. The total number of shares was 100. In that case, the value of one share would be 10 rupees. in this case, investment bank gives the IPO range. 

For e.g. In this case it would be 10-12. Based on that trading range, the company tells the investors that they can bid for the IPO on that price and Investors then invest money on the IPO. For example IRCTC has an IPO range between 315 and 320. At the time of IPO, a company declares a lot size, IRCTC declared it as 20 shares. It’s purely a kind of lottery system, it is based on luck who will get IPO and who will not. 

A few years ago, D Mart’s IPO took place. Its share was also oversubscribed by 100%. Its price was around 300 rupees. But listed at 600 rupees.  Anyone who got its IPO got more than 100% returns at the beginning itself. And today these shares trade at 1800 rupees.

NFO – NEW FUND OFFER (Mutual funds)

Mutual funds pools money from lot of investors. This money is then invested in different securities. It may be debt, equity, government securities. At the starting phase of any mutual fund, people pool their money together according to the objective and this fund is called NFO. You might think NFO pooled that much money, and after a point of time started investing. So after that stage will that fund stop taking money from the investors?

We have 2 cases:

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  Open-ended mutual funds: They pool money during NFO and start investing. After 5 days, it comes back to the public domain, an investor can invest money again and also do direct investment.

  
  


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  Closed-ended mutual funds: It pools money only during NFO. As NFO gets over, it stops accepting money and money collected so far is invested for a definite time horizon.