Course Code: FIN 204 Section: Q3E55

Course Instructor: Dr. Anil Kumar Course Title: Introduction To Mutual

Academic Task No.: 02
Date of Allotment: 28.09.2022
Student Registration No: 12011327
Funds
Academic Task Title: Analysis of Mutual
Fund- New Fund Offer
Date of Submission: 15.10.2022
Student Roll No: RQ3E55A28

Max Marks: 30 Marks Obtained:

Evaluation Parameters: As Per Rubric:

Learning Outcomes: With the help of this assignment, I was able to thoroughly
learn about new fund offer is and its significance with respect to mutual funds and
investments in mutual fund markets.

Declaration:
We declare that this assignment is our work. We have not copied it from any other
student’s work or from any other source except where due acknowledgement is made
explicitly in the text, nor has any part been written for me by any other person.

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What are Mutual Funds?
A mutual fund is a pool of money that is professionally managed by a Fund Manager. It is a
trust that collects money from a group of investors with similar investment goals and invests
it in stocks, bonds, money market instruments, and/or other securities.
After deducting applicable expenses and levies, the income / gains generated by this
collective investment are distributed proportionately among the investors by calculating a
scheme's "Net Asset Value" or NAV. Simply put, a Mutual Fund is a collection of money
contributed by a large number of investors.
A mutual fund unit has a Net Asset Value per Unit, just like an equity share. The NAV is the
total market value of a fund's shares, bonds, and securities on any given day (as reduced by
permitted expenses and charges). NAV per Unit is the market value of all Units in a mutual
fund scheme on a given day, net of all expenses and liabilities plus income accrued, divided
by the scheme's outstanding number of Units.
Mutual funds are ideal for investors who do not have large sums to invest or do not have the
inclination or time to research the market but want to grow their wealth. Professional fund
managers invest the money collected in mutual funds in accordance with the scheme's stated
objective. In exchange, the fund house deducts a small fee from the investment. Mutual fund
fees are regulated and subject to certain limits set by the Securities and Exchange Board of
India (SEBI).
India has one of the highest rates of savings in the world. Because of this proclivity for
wealth creation, Indian investors must look beyond the traditionally preferred bank FDs and
gold to mutual funds. However, due to a lack of awareness, mutual funds have become a less
popular investment option.
Mutual funds provide a variety of investment options across the financial spectrum. As
investment objectives change - post-retirement expenses, money for children's education or
marriage, house purchase, etc. - so do the products needed to achieve these objectives. The
Indian mutual fund industry provides a wide range of schemes to meet the needs of all types
of investors.
Mutual Fund schemes could be ‘open ended’ or close-ended’ and actively managed or
passively managed-
1. Open-Ended Fund- An open-end fund is a mutual fund scheme that is open for
subscription and redemption throughout the year (akin to a savings bank account,
wherein one may deposit and withdraw money every day). An open ended scheme is
indefinite and has no maturity date.

2. Close-Ended Fund- A closed-end fund is only available for subscription during the
initial offer period and has a set tenor and maturity date (akin to a fixed term deposit).
Closed-end fund units can only be redeemed at maturity (i.e., pre-mature redemption
is not permitted). As a result, after the new fund offer, the Units of a closed-end fund
have been compulsorily listed on a stock exchange and traded on the stock exchange
like other stocks, allowing investors who want to exit the scheme before maturity to
sell their Units on the exchange.
3. Actively Managed Fund- An actively managed fund is a mutual fund scheme in which
the fund manager "actively" manages the portfolio and continuously monitors it,
deciding which stocks to buy/sell/hold and when, based on professional judgement
and analytical research. The goal of an active fund manager is to maximise returns
and outperform the scheme's benchmark.

4. Passively Managed Fund- A passively managed fund, on the other hand, simply
replicates or tracks a market index in the same proportion. Index funds include Index
Funds and all Exchange Traded Funds. The fund manager's job in a passive fund is to
simply replicate the scheme's benchmark index, i.e., to generate the same returns as
the index, rather than to outperform the scheme's benchmark.
New Fund Offer (NFO)-
Introduction-
A new fund offer (NFO) is the initial sale of fund shares to investors by an investment
company. NFOs, like stock market IPOs, are intended to raise capital for the fund and attract
investors. A new fund offer (NFO) is an investment company's first subscription offering for
a new fund.
When a fund is launched, a new fund offer occurs, allowing the firm to raise capital for the
purchase of securities. Mutual funds are among the most popular new fund offerings
marketed by an investment firm. The initial purchase offer for a new fund varies depending
on the fund's structure.
A new fund offer (NFO) is a first-time subscription offer for a new scheme that has been
launched by an asset management company. The fund house can launch an NFO around a
theme or simply to complete their product basket. Once the NFO is over, the fund will reopen
for subscription again and investors have the option to subscribe at the prevailing net asset
value (NAV).
An initial public offering (IPO) is similar to a new fund offer (IPO). Both are attempts to
raise capital to expand operations. New fund offers may be accompanied by aggressive
marketing campaigns designed to entice investors to buy fund units. When new fund
offerings go public, they frequently have the potential for significant gains.

Types-
They are the most commonly encountered type of new fund offering. New mutual fund
offerings may be open-end or closed-end. A new fund offering is also used to launch new
exchange-traded funds.
1. Open-Ended Fund- An open-end fund will announce new shares for purchase on a
specific launch day in a new fund offer. The number of shares available in open-end
funds is unlimited. On their initial launch date and thereafter, these funds can be
purchased and sold through a brokerage firm. The fund company and/or fund
company affiliates manage the shares, which do not trade on an exchange. Net asset
values for open-end mutual funds are reported daily after the market closes. Fund
companies can launch new fund offers for new strategies or add additional shares
classes to existing strategies.

2. Close-Ended Fund- Seeing as closed-end funds only issue a limited number of shares
during their new fund offer, they are frequently among the most heavily marketed
new fund issuances. Closed-end funds are traded on an exchange and have daily price
quotes available throughout the day. Closed-end funds can be purchased through a
brokerage firm on the day they are launched.
 3. Exchange-Traded Fund- A new fund offer also introduces new exchange-traded funds
(ETFs). An exchange-traded fund is a type of investment fund that can be traded
publicly on the stock exchange. Vanguard will introduce the Vanguard Ultra-Short
Bond ETF on April 7, 2021. (VUSB). Vanguard reports that the "The goal is to
provide current income while keeping price volatility to a minimum. The fund's
portfolio is comprised of a diverse mix of high-quality and, to a lesser extent,
medium-quality fixed-income securities. The fund's dollar-weighted average maturity
is expected to be between 0 and 2 years."

4. Interval funds- These are a mix of closed ended and open ended funds. They are
closed ended funds but do allow purchase and redemption on the AMC window at
regular intervals, which could be annual or semi-annual.

Advantages & Disadvantages-

Investing in a new mutual fund may appear to be an exciting way to diversify your portfolio,
but there are some issues you should be aware of before doing so. Many investment firms, for
example, launch a new fund when the market is strong and investors are eager to get in on the
latest new industry or sector of the economy. However, just because a particular technology
or industry is popular now does not guarantee that it will remain so in the future.
Furthermore, a new fund offer is frequently accompanied by a higher expense ratio than
usual.
One of the most obvious risks of investing in an NFO is that the fund has no track record of
success (or failure). While some bullish investors may see this as an opportunity for large
profits, there is a significant risk in investing in a fund whose performance cannot be tracked.

Upsides Downsides
Access to emerging sector of the Potentially larger expense ratio
economy
Provides ability to diversify portfolio Emerging technology or industry the
fund tracks may be overvalued

How To Choose An NFO?

1. Investment Theme of the Scheme-

Begin by learning about the mutual fund scheme's investment theme. Every NFO
states in its Scheme Information Document (SID) what it hopes to achieve (high
returns, capital appreciation, etc.) and how.
To answer the 'how' question, look at how the scheme intends to allocate its assets,
whether it will be an equity-oriented scheme, invest primarily in debt and money
market instruments, or take a hybrid approach.
2. Track Record of the Fund House-
A further important factor to consider is the fund house's track record and market
reputation. You can do this by looking at how long the fund house has been in
business, how many mutual fund schemes it currently offers, and how well these
schemes have performed.

It is safer to invest in the NFOs of established fund houses rather than newly
established fund houses. However, it should not be the sole basis for selecting or
rejecting a specific fund house. In India, there are many newly established fund
houses that offer fewer but higher-performing schemes.

3. Track Record of the Fund Manager-

Knowing the track record of the fund manager is just as important as knowing the
track record of the AMC because the fund manager is ultimately in charge of your
money invested in the scheme. You can examine a fund manager's track record by
looking at the performance of the schemes he currently manages, the performance of
the schemes he previously managed, or his total number of work experience in the
mutual fund industry.

4. Costs Associated with the Scheme-

Investors are quite often swayed away by the appealing NFO price, which is typically
as low as Rs. 10, and fail to consider the costs associated with an NFO. It is important
to look into the associated costs such as the Entry Load, Exit Load, and so on. Some
fund companies are charging an exit fee if an investment is revived before a certain
time period. Before investing in any investment instrument, it is always important to
be aware of the associated costs.

5. Tax Implications- Mutual fund earnings are classified into two types: dividends and
capital gains. While dividend earnings are subject to a Dividend Distribution Tax
(DDT), which is deducted by the fund house from the dividend paid to you at a rate of
10%, capital gains are taxable in the hands of the investor. The tax treatment of
capital gains varies depending on the type of mutual fund.

6. Differentiate between IPO & NFO-

An NFO is frequently confused with an IPO (Initial Public Offering). NFOs and IPOs
are two distinct concepts that should not be confused with one another.An initial
public offering (IPO) is the sale of a company's shares prior to its listing on a stock
exchange. An NFO, on the other hand, is the first subscription offer for units in a new
mutual fund scheme. Based on the supply and demand for the company's shares, an
IPO may be available at a premium, discount, or at face value. The mutual fund units
in an NFO are only available at the NFO price specified in the SID.
Investing in NFO-

It is possible to invest in new fund offerings through both the offline and online channels.
Before you invest in a fund's NFO, a word of caution. You must have completed your KYC,
so check your KYC status first before investing. If you apply for the NFO and are found to be
KYC non-compliant, your application will be rejected. Consider investing in NFOs both
online and offline.

1. Offline Mode-

• In an offline mode, you fill out a physical form and sign it with your folio
number or other details after verifying your KYC status.
• Offline investments in NFO are typically made through a broker, but they can
also be made directly through the AMC office. The AMC will walk you
through the steps.
• If you are using an authorised broker, contact the broker and submit the form,
cheque, and other details.
• In most cases, the broker will also act as a financial advisor, advising you on
fund selection, SIP structuring, and so on.
• If you already have a folio number for that AMC, you can simply enter it and
the system will pull out the majority of your data.
• Fill out the offline form completely, verify the details, and sign it before
submitting it to the broker, along with the NFO payment cheque.

2. Online Mode-

• In an offline mode, you fill out the NFO application online. You can check
your KYC status before investing online. You have the option of using the
web interface or the mobile app.
• Login/register to your Online Trading Account using your unique user name
and password, as well as second level authentication.
• The available NFOs can be found on the website. Typically, your online
broker will provide you with all of the NFO investment information.
• Based on your proposed allocation, select the best fund to invest in and the
amount to invest. There are online resources available to assist you in the
process.
• Finally, enter your investment amount and whether you want to participate in
the form of a lump sum or a SIP.
List of Current NFOs available for investment in India-

• Currently Open-
• Recently Closed-

• Closed & Listed

Things to Keep in Mind before investing in NFOs-

1. The fund house's reputation-

The reputation of the fund house is the most important factor to consider when
investing in any NFO. An AMC that consistently launches good mutual fund schemes
with a track record of success will undoubtedly attract more investors. The fund
house's goodwill will instil confidence in investors that the fund has the potential to
meet its objectives and maximise returns for investors.

2. Investment time horizon and amount-

Another important factor to consider is the fund's investment horizon. Some NFOs
may have a lock-in period and a different investment horizon, which may not match
the investors' investment style or objectives. Furthermore, NFOs have a set minimum
investment amount, which may differ from the amount when the fund is open for
regular subscription. As a result, it is critical to understand these parameters and
ensure that the investment budget and investment horizon are in line with the
investors' expectations as well as their financial objectives.

3. The NFO's Objective-

The NFO's objective is essentially the framework that it will use to select assets or
allocate funds that will ultimately generate returns for investors. To ensure a
profitable portfolio, the fund's objective should be in line with the investors' risk-
return perception. As a result, before making an investment decision, investors should
understand the fund's basic objective and investment pattern.

4. Theme of NFO-

NFOs are based on a specific theme, such as capital appreciation, value investing, or
growth investing. Funds can thus choose assets based on a specific sector to capitalise
on the current market swing or uptrend. Such sectoral funds have a limited scope of
diversification, but they should have a strong investment strategy because the fund
should be able to provide returns to investors even if the sector is cyclical.

5. Other considerations-

Other factors to consider when choosing an NFO include the fund manager's
experience and expertise, the SID (scheme information document to understand the
fine print), personal risk tolerance, and so on.
Conclusion-

NFOs provide an excellent opportunity to reevaluate the investment portfolio and include
new funds that may be more dynamic and can help meet investment goals more quickly.
However, it is best not to get carried away by the market buzz surrounding an NFO if it is
nothing more than old wine in a new bottle, i.e., if there is no value addition to the personal
investment portfolio other than increased capital outflow with limited additional returns.

Investing in the same can have multiple benefits though, it is always important to understand
the costs, terms and conditions, and one’s own appetite of risk there is at the time of
investment in order for it to be a successful venture.

References-
• https://www.amfiindia.com/investor-corner/knowledge-center/what-are-mutual-funds-
new.html#:~:text=A%20mutual%20fund%20is%20a,instruments%20and%2For%20o
ther%20securities.
• https://www.amfiindia.com/new-fund-offer
• https://www.investopedia.com/terms/n/new_fund_offer.asp#:~:text=A%20new%20fu
nd%20offer%20(NFO)%20refers%20to%20the%20initial%20sale,the%20fund%20an
d%20attract%20investors.
• https://economictimes.indiatimes.com/definition/new-fund-offer
• https://groww.in/nfo
• https://www.paisabazaar.com/mutual-funds/how-to-choose-an-nfo/
• https://www.indiainfoline.com/knowledge-center/mutual-funds/how-to-invest-in-new-
fund-offer-
nfo#:~:text=The%20first%20step%20is%20to,all%20the%20NFO%20investment%2
0details.