What is an NFO? How is it different from an IPO?

NFOs or New Fund Offers are basically new schemes that are launched by asset management companies to raise funds through new schemes for the first time, just like a company raises funds through an IPO. Though it is similar to an IPO, some features also make it a bit different from an IPO.

Mutual fund companies have various products (ie mutual fund schemes) that invest in different kinds of securities (like debt securities, government securities, equity shares, etc) over different timelines.

For eg: Aditya Birla's mutual fund company has a scheme called 'Sun Life Nifty 50 Index Fund' which only invests in the Top 50 companies that are listed on the NSE 50 index. While Union Bank of India's investment company has a scheme called ''Union Retirement Fund'' which invests in equity, equity-related instruments and debt instruments. 

When asset management companies come up with new schemes to raise money from investors under a new category, they are called New Fund Offers or NFOs.

Why do mutual funds offer NFOs to the public? Just like companies use IPOs to raise money from the public, NFOs are generally launched by mutual fund companies to invest money towards a new goal or undertake a new kind of investment. This means mutual fund companies have either of the two intentions to offer NFOs: they either want to attract a new target audience or want to simply raise funds so that they can invest the funds in multiple securities. 

What is the New Fund Offer process like? Just like IPOs, asset management companies open the subscription process to a new fund for a period between 10 to 15 days. Investors can invest money in this new fund and receive units that usually have a face value of Rs 10. Once they receive units they have to either hold them for a fixed maturity time (close-ended funds) or they can sell these units in the market eventually (open-ended funds) at a price called net asset value. The net asset value changes over time and is like a share's price. 

But unlike an IPO (where companies can sell existing shares or issue new shares or issue fresh shares and sell existing shares in an IPO), mutual fund houses have to compulsorily issue new units to these investors. Also, investors only have some understanding of a concept and some strategic information about this new scheme because there is no past data that investors can receive unlike an IPO, where investors can figure out a company's past data and receive some comfort over investing.  

Mutual fund houses have a target collection amount and the public subscription decides if they meet the target or not. If the target is not met, then the mutual fund withdraws the new fund offer and refunds the money to the investors. 

So how is it different from an IPO?

1. No quotas: IPOs do have separate quotas for retail investors, QIBs and financial institutes whereas NFOs do not need such quotas.
2. Valuations: The IPO price often shows the perceived value of a company and a good company will have strong pricing and get better valuations for its shares. Though the price range is predetermined, the actual listing price depends on demand and supply. But NFOs are generally issued at a face value of Rs 10 and do not get affected by demand or supply. 
3. Pricing: A company's IPO pricing is dependent on its PE ratio, its EV/ EBITDA ratio and other ratios as such. But in the case of an NFO, there are no valuation issues since the collected amount is divided into units and invested in the market.
4. Listing day profits: Though stock investors can make a listing day profit on the day the shares list on the stock exchange, the same cannot be said for NFOs. The net asset value grows over a period of time and listing day profit is generally not the intention for investors here.