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A flurry of Initial Public Offerings (IPO's) hit the market recently and with the headlines screaming 'Issue at Par' you can't wait to park your funds in them. Your earlier investments in a couple of equity IPO issues have enabled you to rake in a huge profit and you thought these too would bring in a windfall gain. Not wanting to miss this golden opportunity you are all set to take the plunge. But, give it a closer look and you will realize that these are not equity IPOs but 'IPO's from mutual fund companies. Still confused?
Before you venture any further, be informed that mutual fund companies have found a new way of drawing the attention of the gullible investor - mutual fund IPOs. What exactly is a mutual fund IPO and if the advertisement claims the 'issue is at par' what does it actually mean. Here's giving you a clear picture.
In case of an equity IPO the respective company taps the market for funds at a cheaper rate. In such a case the company has greater scope for appreciation on listing on the stock market depending on a number of factors including promoters back ground, the industry in which the company is operating among others. And many a times the issues are oversubscribed.
On the other hand what a mutual fund IPO at par' effectively means is that, the respective Asset Management Company has launched a new fund/scheme. Once individuals apply for this scheme they are allotted units at Rs 10 (the base price that MFs have now been referring to as 'at par') excluding the several charges such as entry load, management expenses among others and your money is invested in select funds thereafter.
An important factor to be considered before you invest in mutual fund schemes is whether the objectives of the fund is in sync with yours. Know that if your objective is short term gains the mutual fund issue is not for you. Most of you perhaps invest in equity IPOs and exit as soon as it gets a good listing on the stock exchange. If this is what you have in mind a mutual fund IPO is not for you.
Further, the entry and exit cost among others are also important since these add to your cost. Know that appreciation in the price of the units is based on the Net Asset Value (NAV) linked to the stock market and that this is no direct listing as in the case of equities.
In order that investors are not confused between a mutual fund IPO and an equity IPO, the Securities and Exchange Board of India advised fund houses to use the term New Fund Offer instead. Sure, this should set matters straight.
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