The NFO vs IPO debate

Last week while going out for my regular late evening walks, i came across two gullible investors who were discussing the events of the stock market for the past week that had gone by. I was very happy at the first instance to know the levels of interest the markets have created even among bystanders or the lay man on the streets of India. Investing being my favourite topic, as usual i eavesdropped into their tete- a-tete. The word " Reliance" and the prospects of that stock being a multibagger figured frequently in their conversation. One of them (an old man must be atleast 65 plus..we can safely call him a senior citizen..he runs a cyber cafe at the street corner) was issuing his own target for Reliance Industries to reach 5000 by this March end. The thought bubbles that ran in my mind at that moment are reproduced below "Yes ...old man..Reliance will touch 5000 by March end, only and only if crude oil prices were to touch $ 200 per barrel by that time"...i continued to listen to them...Then the old man fires the next sweetener by talking about how NFO's and IPO's are a quick way to make a buck or two.

For the uninitiated an NFO is known as a "New Fund Offerring" of any mutual fund that wishes to raise money from the public at large and deploy it into various asset classes like equities, debt and money market instruments. An IPO is an "Initial Public Offerring" made by companies to raise money for the first time from the public at large through capital market channels to fund their expansion and diversification plans.

Now there is a huge difference between an NFO and an IPO. While an IPO may result in quick profits for an investor provided the valuation of the company coming out with a public issue is right and its fundamentals are strong enough for the company to attract a hefty premium in the stock market, the same cannot be said about an NFO. NFO's take time to invest or deploy their money into the market. They dont take investment decisions in a haste. Sometimes there can be a significant lag effect from the time of collecting the funds to its investment in the market. Its ultimately the asset management company's call and the fund managers prerogative as to when he wants to utilise the funds collected. However in case of an IPO, clear provisions have been demarcated by SEBI which require companies to get listed on the bourses within 18 days from the close of the offer.

Also another wrong notion of the old man was that investing in an NFO that is offerred at a par value of Rs. 10 is better than investing in a Mutual Fund scheme with an NAV of Rs.50. This view is totally absurd as any scheme of a mutual fund will command a higher NAV only because of its superior Investment dynamics and its fund manager's track record. At the end of the day the movement in NAV is determined by the performance of the investments of the scheme.

An existing scheme will atleast have a performance record or a report card to show unlike a NFO which if not managed well will have its NAV dropping below its face value.

Therefore before selecting a particular scheme of a mutual fund these basic test checks will help a long way in ensuring the safety of your hard earned money :

1. Study the Offer document end to end and page to page
2. Compare the performance of various other schemes of the mutual fund and benchmark the
same with the returns of the index (Sensex or Nifty).
3. Study the fund managers track record, previous schemes managed and how each of them
have fared in the past.
4. Identify your time horizon and investing temparament
5. Identify the focus areas or sectors that the fund is bullish on

Lastly, think long term and be long term greedy!!!