Month: April 2022

Back to Blog

IPO – Terms that you must know

April 29, 2022

Initial Public Offerings, or IPOs, have been on the rise these last few years with a lot of companies going through the process recently. These IPOs have created a huge buzz, and have made a lot of investors curious and willing to invest.  Though they are a fairly commonly seen term nowadays, there are a lot of industry terms that can confuse you, or worse yet, make you shy away from an excellent investment opportunity.

While it is important to know the market and which companies are launching their IPOs, it is also important to have a basic understanding of the terms that can help you navigate your way around these IPOs.

Let’s decode in layman’s terms the commonly used jargon, and hopefully make your IPO processes a little easier.

What is an IPO?

Short for Initial Public Offering, an IPO is the point where any existing company decides to invite the public to invest in them by buying their shares. The company, thereafter, gets listed on the stock exchange and is open for investment by the public, with its stock being publicly traded. Any company can only ever have one IPO, though a company may issue new shares after its IPO is completed. In case a company that is already listed on the stock exchange comes out with a new range of shares, it is known as a Further Public Offer.

Pricing and Book Building

The issue/offer price of a share is the price at which a share is distributed to the general public, before they are traded on the stock market and the price fluctuates according to market trends. The process of discovering the issuing price of the shares is known as price discovery and can be done using two methods.

The first, is called a Fixed Price Issue. In this method, the price of a share is fixed by the company (with the help of its Lead Manager) and applications for shares are invited at this fixed price.

The second method is something called book building, where bids are invited for shares, not at a fixed price, but within a range. The lower limit of this range is called the floor and the higher limit is called the cap. During the bid, you can ask for the number of shares you’d like to have and the price that you are willing to pay for them, within the price band. The actual price is then discovered based on the bids received.

What is an Allotment?

Allotment, in simple terms, can be defined as the process by which you are given shares upon your application. During the book building procedure, there are three kinds of investors who can make a bid for the shares.

The first category of investors are the Qualified Institutional Buyers (QIBs). These consist of mutual funds, and foreign institutional investors. The next is retail individual investors. Any investor that makes a bid under Rs. 50,000 can be labelled as a retail investor. The remaining shares are offered to individual investors with a high net worth (HNI) and the employees of the company.

Depending on how a company chooses to go about its price discovery, there are rules that govern what percentage of shares should be allotted to which investors. For example, if a company chooses a fixed price issue, a minimum of 50% of shares should be allotted to retail individual investors.

Once all applications are received and validated, shares are allotted to investors, with everyone who applied getting their allotments in an ideal scenario. When the number of shares applied for is greater than the actual number of shares available, the IPO is said to be oversubscribed. In these instances, shares are again allotted based on prescribed SEBI guidelines. One scenario worth discussing is if an IPO is oversubscribed to the extent that not everyone who applied during the IPO can even get one share. In these cases, final allotment is decided based on a lottery to ensure no preferential treatment.

What is a Draft Offer Document?

Any company aiming at issuing its IPO is required to file its prospectus with SEBI, which contains all the information about the company. This prospectus also tells you why the company is issuing shares for public investment purposes, along with information about the company’s financial position, and the issuing price of the shares.

The Draft Offer Document is first filed with SEBI, at a minimum of 21 days before filing it with the stock exchange. Prior to filing the Draft Offer Document with the Registrar of Companies (RoC), the document needs to be revised with all suggestions from SEBI.

What is a Red Herring Prospectus?

A Red Herring Prospectus is basically the same as a draft offer document and  contains the same information, without the addition of the number of shares being issued and the price per share. The reason for the prices being undisclosed is that a red herring prospectus is used exclusively for book-building purposes.

Who is an Underwriter?

An underwriter is the entity that picks up the remaining shares at the IPO in case all shares are not subscribed to. An underwriter to an IPO can be a merchant banker, a broker, or a financial institution that has given a commitment to underwrite the issue.

In case an underwriter fails to hold up their end of the commitment of picking up the remaining shares, their licences get cancelled by SEBI.

Who are Lead Managers?

Lead managers are the entities who are responsible for acting as the intermediaries between the company and the investors, with proper validated registration from SEBI. They are merchant bankers who are in charge of the entire issue process. It is a lead manager’s role to certify an issue in accordance with the regulations and carry out due diligence that everything mentioned in the prospectus is correct.

Furthermore, they are also accountable for the book-building process, in which case, they are referred to as the Booking Running Lead Managers. Activities that come after the issue, such as the intimation of the allotments and the refunds, are also taken care of by the lead managers.

There are never any guarantees that you will get an allotment on subscribing to an IPO. However, it always helps when you’re familiar with the terms being thrown around during the process and will hopefully help your next IPO application be a little easier to navigate.

Featured Posts

The Impact of Technology on Business Process OutsourcingThe Digital Transformation of Traditional Businesses: How Your Company Can Stay RelevantWhat Makes KFintech’s Corporate Registry Services UniqueThe Ultimate Guide to IPO Investments5 KFintech Platforms Driving Digital Transformation In Corporate India
Back to Blog

Factors to consider while choosing a mutual fund

April 21, 2022

Money makes money, is an often quoted mantra and investors are willing to do just that, aiming to fulfil their personal financial goals. However, with the number of options available at hand when it comes to mutual funds, it is very important for us, as an investor, to understand the kind of investment we want to make, and the exact mutual fund we want to invest in.

Choosing the right mutual fund is a two-step process, and we need to carefully consider multiple factors before we lock in on an option. The two factors that matter the most are our appetite for risk and the reason we’re investing in a mutual fund. Even so, it isn’t a one size fits all solution and the same mutual fund scheme is not perfect for all investors.

Considerations before choosing a mutual fund category

Let’s take a look at some of the more crucial ones now:

Investment Objective: The first, and most important thing to consider before you choose a mutual fund category, is the reason for starting the investment in the first place. The investment can be either short or long-term, depending on our financial aspiration. It can be as short as going on a vacation, or as long as the time it takes for us to retire. The mutual fund category choice we make should depend on the goal we want to achieve with it.

Time Horizon: This is the amount of time we want to keep our money invested in the mutual fund scheme. Some funds invest in shorter-dated debt periods than others. If our investment period is more than 5 years, an equity fund is likely the best option for us. For shorter terms, the market can be extremely volatile, which can be more risky, but there is always the chance of higher earnings as well.

Risk Tolerance: Tolerance or risk appetite is the limit of risk that we are willing to take against the money that is invested in the mutual fund category of our choice. As of 2015, SEBI issued a mandate for all mutual funds to carry a riskometer that indicates the risk level of a fund scheme. There are five levels of risk, namely low, moderately low, moderate, moderately high, and high. It is always best to choose a mutual fund category whose risk category matches our risk tolerance.

Measures to look at when choosing a mutual fund scheme

Now that we have discussed the considerations before choosing a mutual fund category, we should also discuss some of the attributes to look at when choosing the best mutual fund scheme for our purpose:

Performance Against Benchmark: This is a comparison of a mutual fund scheme’s performance against a standard benchmark, which is usually chosen  by the mutual fund house. The investment philosophy of a mutual fund scheme can be said to be guided by its benchmark index. Asset allocations of the benchmark index should ideally be the same as the investment objective of the scheme. For example, the benchmark of a mutual fund with a banking index should be focused on banking stocks. Comparisions against this benchmark will usually reveal whether our fund itself is performing above or below expectations.

Performance Against Category: While choosing a mutual fund scheme, it is important for us to compare the performance of that fund against other mutual fund schemes in the same category. Doing this gives us a broad idea of the fund’s performance, and ensures that we have an understanding of the fund before investing. However, such comparisons should be done only across the same type of mutual fund schemes. For instance, a small-cap mutual fund should only be compared with other small-cap funds.

Performance Consistency: As already stated earlier, the market is a very volatile environment, and it is critical that we know if a fund performs consistently. Consistent returns are important to ensure that our money does not to go waste, and that we get returns during both market ups and downs.

Experience of the Fund Manager: As an investor, we should always be aware of the capabilities of the person who will be handling our finances. It is important to understand how well a mutual fund scheme is being managed by the fund manager.

Company Legacy: Mutual Fund investments should always be made in fund schemes that are brought to us by credible financial institutions. Not only does this remove any chances of fraudulent activities, but it also ensures that the fund is consistent, and that our investments are well researched. A poorly selected stock can cause losses, which is why it is imperative that we check the track record of the asset management company.

Ratio of Expenditure: While our finances are being managed under the mutual fund scheme, there are some charges that are billed to us directly. There are charges for administration, management, as well as promotions and distributions, all of which are expenses incurred during the running and maintainence of the fund, and are included in this figure. The higher the overhead expenditure, the lower our net returns from the mutual fund scheme.

Now that you know what to look for when choosing a mutual fund category or scheme, you should be able to make a more informed decision on your investments. There are a lot of other factors that can influence this decision and it’s outcomes and we always suggest that you consult your financial advisor before making any investment decisions.

Featured Posts

The Dynamic Landscape of Mutual Fund Software | Explained Factors to look for while investing in Mutual Funds for Beginners Mutual Fund Software For Distributors: Things To Avoid While Choosing It Importance of Registrar and Transfer Agent (RTA) in Mutual Fund ServicesThings to consider before choosing the best mutual fund software
Back to Blog

What is the Alternative Fund scenario in India?

April 13, 2022

In order to understand the Alternative Fund scenario (AIF) in India, we first need a clear understanding of what Alternative Investment Funds are. An AIF is  any financial asset that does not fall under regular investments categories, like debts, equities etc. Any funds that are established in India, and are privately pooled investments that collect their funds from high profile investors (national or international), with the purpose of investing the money in accordance with certain guidelines or policies can be classified as an AIF. Any privately held equity, a hedge fund, and even real estate can be considered to be a form of alternative investment.

Since an investment in AIFs is generally manifold higher than an investment in a regular Mutual Fund, they are mostly invested in by High Net work Individual (HNIs). The Stock Exchange Board of India (SEBI) has categorised AIFs into three broad categories, and understanding them should give us a better understanding of the Alternative Funds scenario in the country presently.

AIF scenario in the country

Since its inception in 2012, AIFs in India have seen unprecedented growth and investments in them have steadily gained a lot of traction, with the number of investors increasing year on year. Furthermore, hedging strategies are allowed to be incorporated into Alternative Funds, unlike mutual funds, where there is no scope for implementing similar strategies.

As of 2017, AIFs were regarded as the second most active sector in India. The reason for this high spur of activity within the industry was because of the Indian Government’s allocation of Rs 20,000 Crores to the National Infrastructure Investment Fund. By September of 2020, AIFs managed to raise investments worth a whopping figure of nearly $27 Billion, with a 74.4% compund annual growth rate (CAGR) between the years 2014-20.

However, in India, AIFs are not allowed to invite public investors for subscribing to their securities. Instead, they are privately pooled and raise funds specifically using private investment vehicles only. The minimum corpus for an AIF stands at a high $2.7 million, and the same for an angel fund corpus is at $1.4 million.

In it’s current state, AIFs can be broadly categorised into three sections, which also showcase their market size.

Category I AIF

Category I AIFs are funds that operate with the strategy of investing in a startup or venture in an early stage. SMEs or social ventures, which the government considers to be desirable by the society, are a part of category I AIFs. 

Category I AIFs generally tend to have a positive spillover effect on the economy of the country, due to which SEBI, and the Indian Government, along with other regulators sometimes consider providing concessions and incentives to these AIFs. 

Under the regulatory framework, Category I AIFs may be sub-categorised into venture capital funds, infrastructure funds, social venture funds and so on.

Category II AIF

Alternative Investment Funds that have a motive of investing in multiple securities, that comprise both equity and debt, can be put under Category II AIFs. These funds cannot be put under Category I or Category III by SEBI and other regulators, and are not given any particular concession or incentives by the Government for investing in these funds. However, Category II AIFs are the largest component of the Indian AIF industry, and alone makes up for nearly 77% of the same. Close ended funds like private equity funds, debt funds and fund of funds can be considered to be Category II AIFs.

Category III AIF

This category of Alternative Investment Funds undertake complex strategies and diverse trading methods to get short term returns on their capital. These can be open ended as well as close ended funds, which have the option of making an investment in both listed and unlisted derivatives. Unlike conventional investments, they are less regulated and hence do not have the requirement of publishing their information on a regular basis. However, like Category II AIFs, the AIFs in Category III are also exempt from all forms of incentives and concessions from the government and other authorities. Hedge funds can be said to be an example of a category III AIF.

While AIFs raise funds from high profile private investors, there are taxation rules that apply to these funds. Category I and II AIFs are exempt from taxes, and the fund itself does not have to bear taxes based on its earnings. However, the investors, on the other hand have to pay taxes based on their respective tax slabs. Investors have to pay a tax ranging from 10% to 15% based on the holding period, provided there has been capital gained from the stocks.

The Category III AIFs fall under the highest tax slab at the fund level, with the rate standing at 42.7%. The investors are given their returns post the deduction of relevant taxes.

Featured Posts

AIFs in India: Key Factors to Choose Before InvestingDecoding the Categories of Alternative Investment Funds in IndiaEmerging Trends, Features, and Regulations of AIFs in IndiaHow to invest in alternative investment funds in India?A New Financial Era: Alternative Investment Funds in India
Back to Blog

The different types of Mutual Funds

April 12, 2022

You may have heard of the term ‘Mutual Funds’ frequently over the last few years, but do you know exactly what they are? 

Mutual Funds are investment platforms that pool money from different investors, and provide these investors with returns on the collected corpus over a period of time. This accumulated money pool is invested into the equity market by investment professionals, who are known as portfolio managers or fund managers. Fund managers invest your money into various forms of securities, like stocks, gold, bonds and other similar assets, which have the potential to provide satisfactory returns. These returns are then shared amongst the investors proportionate to their investment in the mutual fund. 

While the crux of mutual fund investments is market returns, they can be classified into various segments, based on their investment goals, and other forms like structure and asset classes.

Classification on the basis of structure

Close-Ended Funds: Close ended funds are ones which are available for purchase only during an initial offer period. For the purpose of providing liquidity, these schemes are often listed for trade on the stock exchange. Close ended mutual funds need to be sold via the stock market at the prevailing price of the shares.

Open-Ended Funds: Open ended funds are those which can be purchased throughout the year. Open ended funds allow you to keep investing as long as you want, without any limits being imposed on the investment amount. Because of the active management these funds are subjected to, open ended funds charge a higher fee when compared to passively managed funds. Since they are not bound to a particular maturity date, open ended funds are the perfect choice if you are looking for liquidity.

Interval Funds: Interval funds are a combination of both open ended and close ended funds. These can be purchased at different time periods during the tenure of the fund. During this time, if you are a shareholder and wish to sell the shares, you can offload them to a fund management company that offers to repurchase the units from you.

Classification on the basis of asset class

Equity Funds: These are funds which provide high returns, but also come with high risk. Equity funds invest in company shares and are linked to the stock market, which is why returns may fluctuate.

Money Market Funds: Money Market funds invest in liquid instruments like Treasury Bills (T-Bills). They are moderately safe and good for you if you are looking to gain immediate returns. The risks associated with these kinds of funds are credit risks, reinvestment risks and interest risks.

Debt Funds: As implied by the name, Debt funds invest in company debt instruments like debentures, and other fixed income assets. They are safe investment platforms and deliver fixed returns.

Balanced or Hybrid Funds: These funds combine both equities and debts, however, the proportion invested in each varies between funds. Both the risk and returns are balanced out in a similar fashion. Investments are done in a mix of different asset classes.

Classification on the basis of investment goals

Income Funds: These funds are primarily used to invest in instruments providing a fixed income. The main motive of income funds is to provide you with a regular stream of income. 

Growth Funds: Growth Funds primarily invest in the equity market with the aim of gaining revenue from capital appreciation. These are subject to market risks, and are beneficial if you are looking to make high returns on your investments.

Liquid Funds: These are very short term investments that provide you with high liquidity. While they are low risk investments, the returns from liquid funds are moderate, and good for you if you have short timelines.

Capital Protection Funds: Capital protection funds are invested in a split between equity markets and income instruments with a fixed return. The motive of making the split investment is to protect the principal amount invested by you. 

Tax-Saving Funds: With high risk and high returns, these funds primarily invest the capital in equity shares, which qualify for deductions under the Income Tax Act.

Pension Funds: These funds have the aim of providing you with regular returns on your retirement after a long investment period. While they are mostly hybrid funds, they have low but stable future returns.

Fixed Maturity Funds: These funds invest in the debt market instruments which have a similar maturity period as the fund. 

While it is definitely beneficial to be aware of the forms of mutual funds and align these with your financial goals, you should also know about the risks associated with each and consult your financial advisor before making any financial decisions.

Featured Posts

The Dynamic Landscape of Mutual Fund Software | Explained Factors to look for while investing in Mutual Funds for Beginners Mutual Fund Software For Distributors: Things To Avoid While Choosing It Importance of Registrar and Transfer Agent (RTA) in Mutual Fund ServicesThings to consider before choosing the best mutual fund software