Recent times have witnessed a surge in the launch of mutual fund IPOs (initial public offerings).
If 2003 will be remembered as the year for MIPs (monthly income plans), the trend so far suggests that 2004 is likely to be the year for innovative launches. We have seen everything from thematic funds, tiger funds, leadership funds to P/E funds.
So should investors consider investing in these funds? Let us find out.
While there is inherently nothing wrong with investing in an IPO, the decision to invest in one should be triggered by its ability to fill a gap in the investor's portfolio.
Investing in an IPO should be a step towards achieving that ideal portfolio. If the IPO can help you achieve the aforementioned goal, then investing in the IPO would make perfect sense.
On the contrary if the newly launched fund offers what is currently being offered by an existing fund, investing in the latter might make more sense.
Let us explain this better with an example. Sundaram's forthcoming India Leadership Fund whose objective is to "invest in stocks that are 'leaders' in their respective sectors/ sub sectors. Leaders are those companies that take the top ranks in terms of net revenue or total income. . ."
Most large cap diversified equity funds do precisely the same, i.e. invest in top performing stocks from various sectors. It could be a prudent move to invest in the some of the existing funds whose track record is known. One must remember that investing in an IPO involves a risk since it involves venturing into unfamiliar territory.
Another factor which attracts investors towards IPOs is the issue price of Rs 10. Investors tend to associate the opening price of a mutual fund scheme with that of an equity issue. While the book value and the market value of an equity share are divorced from each other, in the case of a mutual fund, the net asset value (NAV) represents the underlying value of the assets held by the scheme, i.e. the book value and the asset value are the same.
Hence an Rs 10 NAV need not be perceived as smart purchasing opportunity. Let's study how some of the recently launched (at Rs 10) schemes are performing at present.
NAV size doesn't matter
| Sector Funds | NAV (Rs) | 1-Wk | 1-Mth | Incep. | Incep. Date |
| UTI THEMATIC BANKING | 8.59 | 5.53% | -14.87% | -14.53% | April-04 |
| UTI THEMATIC AUTO | 8.81 | 2.32% | -11.72% | -12.34% | April-04 |
| RELIANCE POWER SECTOR GR | 9.58 | 1.18% | -4.56% | -4.56% | May-04 |
(NAV data as on June 7, 2004, Growth over 1-year is compounded annualised)
Having stated the downside of investing in IPOs, now let's consider when you should consider investing in an IPO.
If the IPO offers a unique product (distinct from the ones available) which makes a right fit in your portfolio, then the same should be considered.
Similarly if the product belongs to a category where the existing schemes are laggards or mediocre performers, then the IPO could prove to be smart choice.
Finally the AMC (asset management company). If the scheme comes from a fund house which you explicitly trust and whose management style you are comfortable with, the IPO could be given a look in.
