What is the difference between investing in a mutual fund and in an Initial public offering of a company?

"Investing in Mutual Fund" means indirectly Investing in Bunch of Equities (scheme based) on the specific Asset Allocation of the Mutual Funds. Such stocks are available to invest through stock exchanges in secondasry markets or even in initial public offers based on the Mutual Funds Scheme features. An Investor can simply invest under the suitable schemes of the Mutual Funds and thgrough the Fund manager based on the scheme objective the investments are made on Net Asset Value basis but "Investing in Initial Public offer of a company" means the specific program of the company to bring in the sale of its equity through Public offer under strict norms stipulated by SEBI and Investors can participate in the same based on their categories like Individual or Corporate or others...and as per the rules as specified by the IPO Mandate. It briefly means that this is an offer made by the company directly to the investors at specific Minimum and Maximum Price band.

A mutual fund is a pool of resources invested and managed by experts. Thus an investor gets access to a host of different companies by investing in a mutual fund.

An intial public offering of a company is the first time a company gives investors an option to invest in their business. 

Mutual Fund is pooled investment vehicle, where monies (investments) of thousands & lakhs of investors are pooled (aggregated) to invest in a basket of securities (like bonds and equity shares). ‘Open Ended’ Mutual Fund Schemes are open for investments all the time. Every mutual fund scheme starts with New Fund Offer (NFO), when the units of that scheme are offered very first time to the public (investors) at a starting NAV (Net Asset Value, i.e. price of each unit or share of the fund) of Rs.10 per unit (usually). Thereafter, when scheme is available on ‘open ended’ basis, investors can invest in / sell units of that scheme at the NAV prevailing on the day of investment. When you invest in a Mutual Fund, either during NFO or an ongoing basis in open-ended scheme, you will invest in diversified ‘PORTFOLIO’ of securities (ex: equity shares of several companies). As it is a pooled investment, ownership of the securities owned by the fund, is also like shared ownership (among all the investors of the scheme).

 

IPO (Initial Public Offer) is the offering by a specific company, where that company issues its shares/stock to the public (investors) very first time, at specific pre-determined price (or range / band of price). Thereafter the stock gets listed on the stock exchange for further trading (buying / selling) at the price prevailing at the time of transaction. When you invest in shares of a company during IPO or anytime later through Stock Exchange, you are basically buying/investing in the shares of a SINGLE company and you’ll be the sole owner of those shares.

A mutual fund is a basket of different investment instruments (like shares or bonds) professionally managed by a fund manager. Whereas an IPO or an Initial Public offer is a primary offer for sale of an individuals companies stock to the public. 

Investing in a mutual fund and an Initial Public Offer (IPO) are very different. Mutual funds could be equity or debt and in the case of equity mutual funds the only similarity is that the underlying is an equity product.

In the case of an equity mutual fund, the underlying portfolio is a basket of equity shares and possibly some cash (to manage liquidity) as per the mandate of the mutual fund. So, the risks are diversified across many companies. Even in the case of a New Fund Offer (NFO) of a mutual fund, the underlying portfolio consists of a basket of shares of companies (existing) aligned to the NFO strategy (only thing which is new).

In the case of a IPO, it corresponds to the first public offer for a new company , so in that sense it is concentrated to just 1 company and that too which has no track record of the public offer. This is not to say that investing in an IPO is a good strategy or not for that would depend on the potential and the offer price of the IPO.

In short the risk/ return profile of an IPO is very distinct and different from an NFO of an equity mutual fund. And the difference only grows if you consider a regular running existing mutual fund as the question alludes to.


 

All the data/information shared above are opinions/ views that solely belong to the Mutual Fund Distributors. UTI Mutual Fund (acting through UTI Trustee Company Pvt Limited) / UTI Asset Management Company) owes no responsibility/ liability whatsoever in this regards. The information contained should not be construed as forecast or promise, and the only objective of this initiative is to educate the consumers to take a more informed investment decision. Any investment decision taken based on the information provided in the content above shall be at sole risks, cost and consequences of the user.



 


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