Face-off. IPO vs NFO: Similar, but different

The swell of new fund launches seems far from ebbing. And with several companies lining up pitches to go public, a stream of initial public offers looks to be in the offing. Treating an NFO on par with an IPO is quite common, but they are, in reality, very different from each other. Here’s how.

An IPO’s price is the price at which the stock is allotted to you. In a fund, the ‘price’, so to speak, is its net asset value (NAV). The NAV is the per unit value of the total market value of the securities in the portfolio.

In a new fund offer, since there are no investments yet, the allotment is done at ₹10. This lower NAV means that you have a greater number of units — often interpreted to be a good thing as it is ‘cheap’.

But the idea that an NFO is cheaper and that you can make off with a quick gain like an IPO is flawed. When an IPO lists on the bourses, the market is out to judge its inherent value. The price moves depending on what the market makes of the company’s prospects, business and financial strength.

For instance, the most recent IPO, Shemaroo Entertainment, was priced at ₹170. On the day it listed in October, the stock closed at ₹171, a price around which it hovers still. The market didn’t take too kindly to the pricey offer, stiff competition and other troubles. But take the IPO of Snowman Logistics. Priced at ₹47, it is now ₹102, a 117 per cent gain in about three months time, on a promising outlook in a growing industry.

An NFO deploys your money in a basket of stocks. The fund’s NAV, derived as it is from the market value of the underlying portfolio, depends on the performance of those stocks. If several stocks tank, the NAV drops and vice versa.

There is no ‘discovery’ of a fund’s value — it cannot be driven up or down by supply and demand as an IPO or any other stock is.

Next, an NFO is assumed to be cheap, as allotment is done at ₹10. A lower NAV means more units and thus a better situation than a fund with a higher net asset value (NAV). But it’s the value of the investment that is important in a fund. Consider an example.

Say you invested ₹10,000 in DSP BlackRock Focus 25 at the time of its NFO in July 2010. You would have been allotted 1,000 units. This investment now will be worth ₹16,319 (NAV is ₹16.319). But suppose you had, at the time, put the same ₹10,000 in DSP BlackRock Equity fund, which had an NAV of ₹16 then. You would have had a fewer 625 units. But these units are now worth ₹17,018 with the fund’s NAV at ₹27.

In an IPO, ‘cheap’ does not refer to the absolute price, but to the valuation at which it is offered. There is the chance that it is priced at reasonable valuations (price-earnings multiples) and zooms on listing. This allows an IPO to be bought cheap, as with NBCC or Persistent Systems.

In an IPO, the offer document gives detailed explanations of what the company does, its competitive advantages, risks, financials, industry background and so on. This helps you to take a more informed decision.

An NFO lacks history and track record. It all depends on the wiles of the fund manager. This makes investment in an NFO riskier, as there is no yardstick by which to measure performance.

That’s not to say IPOs are the cat’s whiskers, though. Of all the IPOs that have come up in the past seven years, more than half of them are trading below issue price. As for NFOs, ignore them unless the pitch is unique or is timed perfectly, both of which are rare.