NFO vs IPO

People often confuse NFOs with IPOs and expect similar listing gains. However, NFOs do NOT provide listing gains like IPOs do. This is a crucial misconception that needs to be clarified.

Why NFOs DONT have Listing Gains?

Fundamental Difference in Structure

• IPOs: Company shares are listed on stock exchanges and can trade at prices above or below the issue price on the first day, creating potential listing gains
• NFO Trading Mechanisms:
• • Open-ended Mutual Fund units are not traded on stock exchanges. Instead, investors buy and sell these units directly with the fund house at the prevailing Net Asset Value (NAV), which is calculated daily based on the fund's underlying assets.
  • Closed-ended Mutual Fund units are listed and traded on stock exchanges after their initial offering period. These units can trade at market prices that may be either above (at a premium) or below (at a discount) their actual NAV, depending on market demand, supply dynamics, investor sentiment, and fund performance expectations.

Pricing Mechanism

• IPO: Market forces determine the listing price, which can be significantly higher than the issue price
• NFO: Units are allotted at the fixed offer price (usually Rs. 10) and thereafter trade at NAV, which reflects the actual value of underlying assets

What happens after NFO Closure?

No "Listing" Event

Unlike IPOs, NFOs don't have a listing day where prices can surge. Instead:

• The fund starts investing the collected money in securities according to its mandate
• NAV is calculated daily based on the market value of holdings
• Investors can buy/sell units at the prevailing NAV

NAV-Based Returns Only

• Returns depend entirely on the fund's portfolio performance
• No immediate gains from market sentiment or demand-supply dynamics
• NAV changes gradually based on underlying asset performance

When can NFOs generate Returns?

NFOs can generate returns, but only through portfolio appreciation over time:

Long-term Portfolio Growth

• If the fund manager invests wisely and the portfolio grows, NAV increases
• Average equity NFOs in India: 12-15% annual returns over a decade
• Returns are steadier due to diversification but no immediate listing pop

Market Timing

• If launched during market lows and markets subsequently rise
• Fund performance depends on when and what securities are purchased
• No guarantee of outperformance compared to existing funds

Common Misconceptions vs Reality

Misconception	Reality
NFOs give listing gains like IPOs	No listing gains - units trade at NAV only
Rs. 10 price means "cheap" entry	Price is irrelevant - what matters is the portfolio
Early entry advantage	No advantage over existing similar funds
Limited supply creates premium	Unlimited units available post-NFO period for Open ended funds

Why the confusion exists?

Marketing Similarity between NFO and IPO

• Both have subscription periods with marketing campaigns
• Both are "first-time" public offerings
• Both require application and allotment processes

Rs.10 Unit Price Perception

• Investors perceive Rs. 10 as "cheap" compared to expensive stocks
• In reality, the absolute price is meaningless - only returns matter

Launch during Market Peaks

• NFOs often launch during market highs when investor interest is maximum
• This coincides with IPO activity, creating false parallels

Should you Invest in NFOs?

When NFOs Make Sense

• Unique investment strategy not available in existing funds
• Experienced fund manager with proven track record
• Specific theme/sector you want exposure to

When to Avoid NFOs

• Seeking quick listing gains (won't happen)
• Thinking Rs. 10 price is advantageous
• No clear differentiation from existing funds

Expert recommendations on NFO

Generally Avoid NFOs Unless:

1. Innovative strategy genuinely different from existing options
2. Fund house reputation and manager expertise are exceptional
3. Long-term investment horizon (5+ years)

Better Alternatives

• Existing funds with proven track records
• SIPs in diversified equity funds for regular investment
• Index funds for low-cost market exposure

Key Takeaway

NFOs are fundamentally different from IPOs and do not offer listing gains. The Rs. 10 unit price is merely a starting point, not an indicator of value. Returns depend solely on the fund manager's ability to generate portfolio appreciation over time.

For most investors, sticking to established mutual funds with proven track records is a better strategy than chasing NFOs expecting IPO-like gains that simply don't exist in the mutual fund structure.

Regards,

Honvest Team.