When To Apply In IPO, NCD, OFS And NFO

With the Indian market showing a lot of buoyancy, entrepreneurs have been coming up with newer and newer ways to raise capital. However, with a lot of options available, the discourse has shifted to a new question – when to apply for which route. Initial Public Offering (IPO), Non-Convertible Debentures (NCD), Offer For Sale (OFS), and New Fund Offer (NFO) are some of the ways to raise money. Which one is the best? Let's take a look.

What is NFO?

A New Fund Offerings, or NFO, is the initial period when a mutual fund is open for an initial subscription and is offered to the public for the first time. 

NFOs are usually launched with a marketing campaign to generate interest and attract investors. NFOs typically have a subscription period, during which investors can buy units in the fund.

After the subscription period ends, the fund manager invests in investment instruments as the fund's investment objectives. However, it is important to keep in mind that investors can invest and redeem from open-ended funds after the fund opens again after the NFO period. However, in the case of close-ended funds, the NFO period is the period when the investors can invest in these funds. 

What is an IPO?

An Initial Public Offering (IPO) is the first sale of shares by a company to the public. It can be used to raise new equity capital for a company or to enable existing shareholders to sell some of their holdings. IPOs are typically underwritten by investment banks, who also seek to manage the process and maximise the proceeds for the company.

IPOs are a key source of funding for many companies, especially start-ups and small businesses. They can provide the capital needed to finance new products, expand operations, and hire new staff. IPOs can also be a way for companies to generate liquidity for existing shareholders.

There are many risks associated with IPOs, particularly for investors. These include the risks of investing in a new or relatively unknown company, the lack of a track record for the management team, and the possibility that the shares may be overpriced.

Despite these risks, IPOs might be a lucrative investment for those who are willing to take on the risk. They can offer the opportunity to get in on the ground floor of a new company with the potential for high returns. For these reasons, IPOs will continue to be a popular investment option for many people.

Benefits Associated with IPO

IPOs can be a great way for companies to raise money and be a good investment opportunity for individuals. Some of the benefits associated with IPOs include the following:

• Companies can raise a lot of money through IPOs.
• IPOs can provide employees and early investors a way to cash out.
• It can increase a company's visibility, leading to more customers and business partners.

Risks Associated with IPO

When a company decides to go public, there are a number of risks associated with the IPO process. 

• First and foremost, there is the risk that the IPO will not be successful. If the IPO does not generate enough interest from investors, the company will not be able to raise the capital it needs, and the IPO will fail.
• Secondly, there is the risk that the stock price might not perform well after the IPO. Investors will lose money if the stock price falls below the IPO price.
• Finally, there is the risk that the company will be unable to meet the expectations of the public markets. The stock price will likely fall if the company fails to deliver on its promises.

What is NCD?

Non Convertible Debentures (NCDs) are unsecured debt investment instruments that cannot be transformed into equity shares of the issuing company. They are typically issued for a fixed term of 3 to 5 years. They offer a higher interest rate than convertible debentures, making them an appealing instrument for people seeking fixed income.

NCDs are typically unsecured, meaning they are not backed by collateral and are therefore considered to be a higher-risk investment than secured debentures. However, the higher interest rate compensates for this increased risk.

NCDs can be traded on stock exchanges, making them liquid and accessible to a wide range of investors.

Overall, NCDs are a popular investment option for those seeking fixed income, as they offer a higher interest rate than other debt instruments and are relatively liquid.

Benefits Associated with NCD

Investors in NCDs enjoy certain benefits, such as:

• NCDs offer higher interest rates than CDs, making them attractive to income-seeking investors.
• They have a fixed tenure, which clarifies the maturity date and interest payments.
• NCDs are traded on stock exchanges, making them liquid and easy to sell.

Risks Associated with NCD

There are a few key risks to be aware of when considering investing in NCDs. These are as follows:

• Firstly, as there is no conversion option, the interest payments made on NCDs are typically fixed, meaning holders are exposed to interest rate risk. If interest rates rise, the value of the NCD will fall as it becomes less attractive relative to other investment options. 
• Secondly, NCDs are unsecured debt, meaning that holders are subordinate to other creditors if the issuer defaults. This puts NCD holders at a higher risk of not being repaid in full.
• To avoid investing in a company that might become a default company, it is essential to carefully research any NCD issuer before investing, to ensure they have a strong financial profile.

What is OFS?

An offer for sale is a contract between a seller and a potential buyer in which the seller agrees to sell the property, and the buyer agrees to buy it. The offer for sale is a binding contract, meaning both parties are legally obligated to follow through with the sale. An offer for sale is a great way to get exposure to your business. It can help you attract new customers and grow your business. 

The Promoters/Promoter Group entities of listed businesses were the only ones who could use this option in the past to reach the required minimum public ownership of 25%. It is easier than other alternatives. However, the section has now been opened up to qualified firms' non-promoters who own at least 10% of the company's share capital.

SEBI introduced the OFS mechanism in 2012 as a way to make it easier for promoters of publicly listed companies to sell their holdings and comply with the minimum public shareholding. The OFS mechanism is available to 200 top companies in market capitalisation.

Benefits Associated with OFS

There are several benefits associated with an offer for sale, including:

• An offer for sale can help you attract new customers and grow your business. It can also help you increase your visibility and brand awareness.
• It is a great opportunity to build relationships with new and potential customers. It can also help you strengthen relationships with existing customers.
• An offer for sale can help you increase your sales and grow your business. It can also help you boost your bottom line, which in turn helps you to attract new customers and grow your business.

Risks Associated with OFS

There are certain risks associated with making an offer for sale, particularly in the case of a public offering which is as follows:

• The most significant risk is that the offering may not be successful, which could result in a loss of the entire investment.
• There is also the possibility that the securities may be sold below the offering price, which would also result in a loss.
• In addition, there is the risk that the company may not be able to meet its financial obligations in connection with the offering, which could lead to default.
• Finally, there is the risk that the offering may be subject to regulatory scrutiny, which could lead to delays or even the cancellation of the offering.

How do market conditions affect each type of funding?

Each type of funding is affected by different market conditions. NFOs are typically launched when markets are bullish, as investors are more likely to invest in new mutual funds. IPOs are usually launched during periods of stability, as companies want to go public when markets are not too volatile. NCDs are generally launched when interest rates are low, making the debt more attractive to investors. OFS can happen during any type of market, as they are typically used by companies that need to raise cash quickly.

How to determine which one to choose?

There are a few key considerations that can help guide your decision on whether to invest in an NFO, IPO, NCD, or OFS. First, you'll want to assess your personal investment goals and objectives. What are you hoping to achieve by investing in a new fund? IPO may be a better option if you're looking for short-term gains. However, if you're interested in a more stable investment with the potential for long-term growth, an NCD or OFS may be a better choice.

Next, you'll want to consider the fees associated with each type of investment. NFOs and IPOs tend to have higher fees than NCDs or OFSs, so if you're looking to keep costs low, these may not be the best options. Finally, you'll want to research the performance of each type of investment in the past. NFOs and IPOs are relatively new, so there isn't a lot of historical data to go on. NCDs and OFSs, on the other hand, have a longer track record, so you can get a better sense of how they tend to perform over time.

Ultimately, the best way to determine which investment is right for you is to consult a financial advisor. They can help you assess your goals and objectives and recommend the best option for your needs.

Bottom Line

There are various options available to investors when it comes to investing in the stock market. Each option has its own set of benefits and risks, so investors need to understand these before making any decisions. NFOs and IPOs can be riskier than NCDs and OFSs, but they also have the potential to provide higher returns. NCDS and OFSs are generally considered to be safer investments, but they may offer different levels of returns than NFOs and IPOs. You should consider all of these factors before deciding which option is right.

FAQs

Is it prudent to purchase OFS?

If the company has a solid reputation and scope for future expansion, investing in an OFS is the best option.

How can I purchase NFO?

You can purchase units of a fund during an NFO period from brokers, online trading accounts, online investment platforms and investment advisors that offer investments in mutual funds. 

When should I invest in NCDs?

NCD might be the right option if you want a fixed return that is higher than fixed deposits. But, it is important to remember that NCDs come with higher risks. 

Does IPO follow a first come, first serve?

No, it is based on investor demand for the IPO. The amount of shares allotted to retail investors in an IPO that is oversubscribed because of significant investor demand will depend on the total number of shares left in the retail quota divided by the minimum lot size. 

Is it prudent to purchase NFO?

Investors should only put money into NFOs if they give them access to a special business opportunity that fits their risk tolerance and financial objectives.