MUTUAL FUNDS & NFO
FAQs - Mutual Funds
What are Mutual Funds?
Mutual Funds are investment schemes professionally managed by financial experts. Many investors, individuals and entities, invest money in these schemes or funds to generate better returns.
These investment schemes could invest in Shares / Stocks (Equity), Government and Corporate Bonds / Securities / Debentures (Fixed Income) or a mixture of the Equity and Fixed Income Securities.
Mutual Funds are bought and sold in Units. Mutual Fund units are allocated to investors basis the proportion of their investments and value of these units is tracked as Net Asset Value (NAV) which is daily released by the Fund houses.
The Securities and Exchange Board Of India (SEBI), and Association of Mutual Funds in India (AMFI) regulates the Mutual Funds industry, and there are around 48 different Mutual Fund houses and more than 3000+ Mutual Fund Schemes.
Is Mutual funds Taxable?
Long term Capital gains tax (if held for more than a year) for equity mutual funds are taxed at 10% for gains withdrawn exceeding Rs.1 lakh in a financial year.
Gains withdrawn up to Rs.1 lakh in a financial year are exempt from Tax.
Short Term Capital gains tax (if held for less than a year) on equity mutual funds’ investments is 15%.
What are various mutual fund scheme options like growth options, dividend options?
Mutual Fund schemes are available in growth and dividend option. Within the dividend option, payout or reinvestment options are available. In the growth option of Mutual fund schemes, profits made by the scheme are invested back into it. This results in the net asset value (NAV) of the scheme rising over time.
When the scheme gains, the NAV rises, and in the case of a loss, it goes down. The only option to realise the profit in the growth option is to sell or redeem your investments.
The dividend option can re-invest (dividend reinvestment option) or pay out the dividends (dividend payout option) the profits made by the fund.
Profits or dividends are distributed to the investor from time to time depending on the profits made. Dividends are declared only when the scheme makes a profit, and it is at the discretion of the fund manager. The dividend is paid from the NAV of the unit.
What are open ended, close ended and interval funds?
Open-ended funds are those which can be purchased and sold anytime.
Closed-ended funds can be purchased from the fund house only at the time of the new fund offering (NFO) and can be sold only once the period of the closed-ended fund has ended.
Interval funds have periodic intervals specified by the funds when they can be purchased and sold.
Why are mutual fund investments better than other investment products
Mutual Funds, historically, have proven to be much better investment avenues than other products available to investors. Investments in MF have proven to be more effective because of the following reasons:
Managed by professionals: Financial experts invest in equity and fixed income products invest on your behalf. They are supported by large teams which assist them in analysing data and dissecting nitty gritty of the markets (macro and micro economic environment, GDP rates, Interest rates and its future outlook, fundamental analysis into each company that they invest or not invest in) which clients as individuals might not be able to do themselves.
Better taxation structures: The government of India offers incentives to customers to invest in mutual funds by providing tax structures. So, while your fixed deposit returns are completely taxable, Investment in debt mutual funds come with tax indexation benefits (which can lower your taxation burden to almost as low as 2% as opposed to as high as 30% in Fixed deposits).
Investments in equity mutual funds have only 10% tax (on gains withdrawn above ₹1 lakh in a year) compared to 30% taxation on FDs.
Gains on equity mutual funds withdrawn up to ₹1 lakh in a year are exempt from tax.
Better Flexibility: Mutual funds are held in units. So you can always redeem your investment partially while keeping the other investment intact and untouched.
This is unlike fixed deposits where you have to fully withdraw your investment and pay pre-mature withdrawal charges on the entire amount.
Better liquidity: Open ended mutual funds can be sold anytime. This is unlike investment like Insurance, PPF, NSC, etc. where you have long lock-in periods and large pre-mature withdrawal penalties.
Better Diversification: Mutual funds invest in multiple securities. This diversifies the risk for you much better than other investments.
What is a lock in – period? id there a lock in period for my investments?
Lock in period is the time during which an investor can not withdraw/redeem his/her investments. Some mutual fund schemes like ELSS/Tax saving funds come with a lock-in period of 3 years as mandated by the government. This essentially means that the investments cannot be redeemed before a period of 3 years from the date of investment in any circumstances.
What kind of Schemes in mutual funds are there?
Equity Mutual Funds
- Large Cap
- Mid Cao
- Small Cap
- Multi Cap
- Liquid Funds
- Sectorial Funds
Debt Funds
- Ultra short-Term Funds
- Arbitrage Funds.
- Balance Debt Funds
MUTUAL FUNDS PARTNERS
NFO
Upcoming
About NFO
Any asset management company launching a new mutual fund in the market can raise capital for the same by announcing a new fund offer (NFO). Similar to the concept of an initial public offering (IPO), details of the portfolio such as the company shares to the purchased, kind of securities to be procured, fund manager, etc. are incorporated in such new fund offers.Through such offers, investors can purchase units of a mutual fund at the subscription price, usuallyset at Rs.10 per unit. Both open-ended and closed-end funds are launched via new fund offers for a limited time period, after which such mutual funds are traded in the market based on their corresponding net asset value (NAV).
Understanding New Fund Offering
As per SEBI regulations, a new fund offering can remain active in the market for a maximum of 30 days. Offer price to subscribe to such mutual funds is Rs. 10, and the collected revenue can be utilised in procuring securities of various publicly traded companies listed in a stock exchange.
After a new fund offer closes, any trade of a respective mutual fund has to be done based on the NAV of the fund. Subscribing to a mutual fund through new fund offers is profitable, as investors get access to respective units at a nominal cost. hence, profits realised at a later date is substantial, allowing individuals to realise immense capital gains once the mutual fund starts trading in the open market.
Types of New Fund Offer –
1. Close-ended funds
These mutual funds are associated with a fixed corpus, raised through new fund offer. After the subscription period is over, no further addition to the portfolio is allowed, and the NAV of the fund is determined based on the number of units in circulation with respect to the total value of underlying assets.
Any purchase or sale of mutual fund units has to be done through market exchange, similar to stock market trading. The price at which the NAV units are traded is subject to the overall demand and supply in the market, determining whether a unit is traded at a premium or discount.
Let us consider an example. Miss Pubali has subscribed to X mutual fund to procure 100 units at Rs. 10 each. After the mutual fund commenced operating in the stock market, the NAV stood at Rs. 12 (due to fluctuation in the portfolio asset prices). Thus, the value of her investment currently stands at Rs. 1,200 (12x100).
For any reason, Pubali decides to sell her investment in the stock market, wherein investors are willing to pay Rs. 15 per unit. Hence, we can conclude that the mutual fund is trading at a premium to its NAV price.
On the other hand, in case of negative outlook regarding the performance of fund X, the price of each mutual fund can fall as well, to, say, Rs. 8 per unit. In such cases, X is trading at a discount to its NAV price, and selling respective shares would incur a loss.
2. Open-ended funds
Most mutual funds can be categorized as open-ended funds, wherein the number of units of the respective fund keeps fluctuating with a corresponding demand. New fund offerings allow individuals to procure units of a mutual fund before its NAV has been determined, thereby allowing them to gain profits in the long run. After a mutual fund starts operating, investors have to pay the respective net asset value for obtaining each unit of the fund.
For example, Monica invests in an open-ended mutual fund Y during itsnew fund offerwith Rs. 500, procuring 50 units. Upon activation of the fund, the NAV value stands at Rs. 20 per unit (as perthe performance of the underlying assets), implying any new purchases have to be made at this price. If she decides to sell her share of the fund, Monika is eligible to receive Rs. 1,000 (50x20) at the new NAV price.
Both open-ended and closed-end funds can be chosen as a tool for investment, as both are likely to generate capital gains as well as dividend returns (depending upon the type of investment scheme). While open-ended funds tend to be actively managed by portfolio managers, close-ended funds are likely to be passively managed to replicate the returns of a benchmark index.
How NFO is a Good Opportunity?
The fund houses make use of NFOs to raise money from the public to purchase securities such as equity shares, bonds, etc in the market. Moreover,New Fund Offeringis usually cheaper as it is new to the market. They are often matched compared to Initial Public Offering (IPO) in which investors can purchase shares before getting listed on the exchange. Also, NFOs are marketed quite well which definitely tempts you to not miss it. However, it’s your hard-earned money and you must do thorough research and out in a well-researched judgement before proceeding with the investment.
How to Invest in an NFO?
There are two ways through which one can invest their money in NFO. Investing in NFO is overall a seamless process and one can choose any one of the below-mentioned methods forinvestment in NFO. All the methods have their own perks; let’s delve deeper into it and check out what are these methods;
1. Through a Broker
This is perhaps the basic method of investing in an NFO. One can always reach out to a broker and they can help you invest in a new fund offer. Always make sure that the broker you are consulting isan authorized one. Your broker can help you out with completing all the formalities regarding the application for NFO. One of the most important benefits of investing through a broker is you get doorstep services and also information regarding the future performance of the fund that you are investing in.
2. Through Online-trading account
This is another method of investing and is convenient too. If you are already into investing in sharesand mutual funds, you must have an online trading account. The same account can be used to investin NFOs as well. The purchasing and selling of the NFO units can be done online. The online trading account can also be used to track the Net Asset Value(NAV) of the investments made.
3. Through Smart Investment
You can also invest in any New Fund Offerings on Smart Investment by following some simple steps:
- Click on Apply Now button and you will be diverted to the next page where you need to complete the remaining procedure
Things to Keep in Mind Before Investing in NFO Funds
Risk-averse individuals should steer clear of equity mutual funds as well as small and mid-cap companies, and hence, opt for NFO funds primarily investing in debt funds or blue-chip companies. Individuals with a high aptitude for risk, on the other hand, should consider investing in aggressively managed equity funds operated by trained portfolio managers.
A new fund offer effectively reduces the cost of investing in mutual funds. Proper assessment of all corresponding factors can help in realizing substantial profits in the long run, through capital gains or dividend pay-outs. However, many individuals often miss out on such investment options as they fail to receive information regarding the same. Most asset management companies release information regarding the same through marketing campaigns in financial journals and press releases, which can be tracked accordingly through their official website.
- The reputation of an AMC: History of an asset management company or investment bank heavily influences the future performance of a new NFO launched. Correspondingly, the background of all portfolio managers should be analysed thoroughly in this respect, primarily if the mutual fund is actively managed.
- Cost of investment: An NFO mutual fund comes with a minimum subscription offer, wherein a stipulated number of units have to be bought to participate in the new fund offering.Thus, a significant investment burden is often imposed on individuals willing to partake in the scheme.
- Nature of securities: An NFO announcement comes with a mandate listing, which incorporates details regarding the types of stock market instruments to be obtained with the raised capital. Going through such documentation is of utmost importance as it indicates the nature of risk associated with the capital invested, as well as expected return on investment (ROI).
Benefits of Investing in an NFO
An investment made in any NFO brings a lot of advantages like diversifying your portfolio by investing in new strategies, great flexibility, profitable, liquidity to name a few. Furthermore, the investment objectives, expected return on investment and the reason for the fund are provided with clarity right before starting. Let’s check some of the benefits of NFO:
Investment in New Strategies: Close-ended funds provides you with a chance to invest in new and innovative strategies that existing open-ended funds may not.
Great Flexibility: Close-ended funds also offers the flexibility of when to invest your money in the market. Even if the timing is bad for investment and the NFO is launched at a market peak, the fund manager can manage to hold a part of your funds to invest them later.
No Large Flows: Unlike open-ended funds, investors in close-ended funds are locked-in as per the tenure of the fund and the fund manager can focus on proper stick selection andtracking. Investment in a close-ended fund can only be made through NFO.
Lock-in support: What matters more is spending time in the market rather than backing out within a short span of time. Many investors just spend two years in the market and end up impairing their returns. However, the lock-in period provided by close-ended funds of 3-4 years helps investors from bad investing behaviour.
On a Closing Note
Investing in New Fund Offers can have multiple benefits if you have done your homework well andknow the core meaning of what is NFO and what benefits you can avail from them. Having comprehensive knowledge regarding a new fund offer and its date of activation can help investors multiply their wealth through promising investment schemes. It is advisable to read the product-related terms and conditions well before settling in for the final investment.