Mutual Funds: NFO vs IPO
People invest in mutual fund NFO thinking that they can make listing similar to IPO of share market, but this is nothing but a myth. Before we dig dipper on difference between IPO and NFO, you should know below listed terms.
NFO: New Fund Offer.
IPO: Initial Public Offer.
NAV: Net Asset Value.
How does stock market IPO work ?
In stock market IPO, listing company offers limited no of company shares for subscription at predetermined price band. There is high demand for shares of companies with good financial track record and management.Since no of shares are limited, no of shares subscribed by investors may be more than offered shares.
On IPO listing day, there is price discovery of share price based on demand and supply in the market. Thus company share may list at price higher or lower than the IPO offer price.
Example: Quick Heal Tech IPO was oversubscribed 10.8 times. IPO issue price was Rs 321, while listing price was
Rs 304.25. Power Grid IPO was oversubscribed 10.8 times. IPO issue price was Rs 52 , while listing price was Rs 85. T
Thus one would have made 5% loss on investing Quick Heal IPO, and 63% profit on investing in Power Grid IPO.
How does Mutual Fund NFO work ?
In case of mutual fund NFO , all units are issued at NAV of Rs 10 and your contribution is used to invest in stock and debt instruments. When the NFO lists , the listing NAV is calculated based on the current value of all mutual fund investments and cash holding. NFO take some 15 days to list after end of subscription, you will make listing gain or loss depending on performance of stocks during this period.Thus there is no opportunity for listing gain in mutual fund through price discovery. If there is any gain, then you would have got similar gain by investing in any existing mutual fund.
Unlike IPO, mutual fund scheme are usually not over subscribed. You can buy units even after NFO listing
Why not to invest in Mutual Fund NFO ?
In a cricket match will you prefer to be part of your team Virat Kohli or newbie who had not even played a single cricket match. Newbie may also perform if he has good talent, but if he does not then you might lose the match.
Now when we speak about mutual funds, fund with good track record is Virat Kohli and NFO is a newbie. Thus Investing in mutual fund NFO can be a bad idea, as you do not know short term or long term performance of fund theme, methodology and fund manager. Better invest in fund and fund house with good performance record rather than mutual fund NFO scheme. It is less risky to invest in fund with good track record as compared to NFO.
Invest in IPO only with good grade assigned by a Credit Rating Agency registered with SEBI.
IPO grade 1: Poor fundamentals
IPO grade 2: Below-average fundamentals
IPO grade 3: Average fundamentals
IPO grade 4: Above-average fundamentals
IPO grade 5: Strong fundamentals