Indian investors are constantly looking for new ways to grow their investments. Among them, two of the most popular ones are Initial Public Offerings (IPOs) and New Fund Offers (NFOs). IPOs allow investors to buy shares in a company’s initial public offering, while NFOs allow investors to invest in a new mutual fund scheme managed by a professional fund manager.
Investors tend to show significant interest in both investment options, but they differ in risk, return potential, and investment time horizons. Some IPOs and NFOs have done exceedingly well, while others have not. This frequently raises a query in investors’ minds: which is better, new listings or new funds? Let’s dive into this in depth in this blog.
Understanding new listings and new funds
An IPO is the initial public offering (IPO) of a company’s stock to the public. Once a stock is listed on a stock exchange, its share price is determined by market demand and supply. Investors who apply for an IPO can gain from the listing if the stock lists at a premium to the issue price, but can also lose out if it lists at a discount.
An NFO, on the other hand, is the first subscription offer of a new mutual fund scheme. NFO units are sold at a fixed face value, usually Rs 10 in India, and returns are based on the performance of the underlying portfolio and not on the day of listing. The Securities and Exchange Board of India (SEBI) has mandated that mutual funds disclose their investment objective, asset allocation, and risk factors before launching an NFO.
Which has actually paid off more?
There’s no clear-cut winner between new listings and new funds, as each has distinct investment objectives. New listings may perform well in the short term when the company has strong earnings, a competitive moat, and a significant number of investors are interested in the company’s IPO in the subscription round. They, however, also have greater volatility and stock-specific risks.
Conversely, NFOs offer diversification as they distribute the investment in a variety of securities and are therefore appropriate to investors who are looking to invest for long-term wealth creation. They are not dependent on the success of any particular company but rather on market conditions, fund management skills, and asset allocation.
Therefore, investors must not only look at the returns of IPOs and NFOs but also at which of them best align with their financial objectives.
Factors to consider before investing
Investors should consider the following factors before investing in an IPO or NFO:
- Investment goals: Determine whether they are seeking short-term capital gains or long-term compounding.
- Risk tolerance: Assess their risk tolerance.
- Investment horizon: Find out the duration of time they are considering investing in, whether it is short-term or long-term.
- Company fundamentals (in case of IPOs): Evaluate the financial health of the company, debt level, and its position in the market.
- Fund objective and asset allocation (in case of NFOs): Understand the strategy of the fund manager and the theme or sector that the fund is targeting to invest in.
Investors can make more informed decisions with the assistance of analytical tools such as an IPO return calculator or an NFO return calculator, along with fundamental analysis to yield better returns on their investments.
The bottom line
Although the IPOs and the NFOs offer opportunities to Indian investors to invest, neither of them can be termed as a sure bet to make higher returns. IPOs are speculative and can yield lucrative listing profits within a few days, whereas NFOs, on the other hand, are tailored for disciplined investors to invest in professionally managed portfolios and are well suited for investors with a longer-term investment horizon.
Therefore, investors should evaluate both opportunities based on fundamentals and not market hype, as the investment with higher payoff is the one that corresponds to their financial objectives, risk-horizon, and investment strategy.
