Stanchart Enterprise Equity Fund: Should you buy?

Standard Chartered Mutual Fund has launched Standard Chartered Enterprise Equity Fund, SCEEF, a three-year closed-ended fund that is looking to invest in IPOs. The amounts not invested in IPOs will be invested in the Nifty. Its simple objective is to buy IPOs and sell them on listing.

The concept of an MF scheme dedicated to investing in the primary market is not a new one. In the past Taurus Newshare and another scheme - UTI Primary Equity Fund had similar objectives. However, these funds soon found that it was not sustainable in the long run.

The former was renamed Taurus Discovery Stock and the latter merged with UTI Opportunities with objectives duly altered.

On the positive side, advisor Hemant Rustagi feels that it would be a good option for people who are just focused on mutual funds and have not looked at the IPO market. Also, it is a good option for small investors who don't have sufficient money to invest in good issues or are unable to get sufficient allotment. The scheme solves the hassles of analyzing an IPO, which is a difficult task.

However, experts feel that while there are positives to Standard Chartered Enterprise Equity Fund, the fund is largely based on several assumptions and speculations.

1) Long-term or short-term investment

"The investment objective of the scheme 'to buy IPOs and sell on listing' goes against the basic philosophy of mutual funds as 'Long Term Investment,'" says investment expert Sandeep Shanbhag.

However, Rajiv Anand, Head - Investments at Standard Chartered Mutual Fund, clarifies that, "Long-term investment option may not necessarily mean that portfolio is static for long periods of time. In fact, it is the Mutual fund that is the long-term investment option and not necessarily the underlying portfolio.

The portfolio today has to be actively managed. The fund has been structured as a closed ended fund to protect the interests of long-term investors.

An investor is allowed to redeem only on select dates within the tenure. Also since the investor knows that the fund will surely invest in a good IPO and exit it on listing and this would reflect in the NAV, a closed ended nature seriously delimits these sets of short-term investors."

2) Will it always find under-priced quality IPOs?

The other concern Experts have is that it would be very challenging for the fund manager to identify under-priced quality IPOs, and this can lead to lack of opportunities to invest.

But Anand has an answer to that, "An IPO listing price of a company can't be viewed with a different lens as compared to the price of an already listed company for in a bull market both these categories (subject to the both companies being relatively well managed and not being penny stocks) would be quoted at a substantial premium as compared to a bear market. So our argument would be even a normal diversified fund that collects monies in its NFO currently would also have to buy into a stock at a premium."

3) Will the fund get the required allotments in the IPOs?

Experts feel that it is too optimistic an assumption especially in the case of quality IPOs that the scheme will get an allotment.

Anand states, 'The fund will not participate in any IPO, which does not have a QIB allotment. As a result we are guaranteed proportionate allotment based on our commitment and the over subscription levels on the QIB portion. An IPO, which has a 50% allocation to QIBs, will also ensure the quality of the IPO.  Investors would not thus lose out.'

4) Supply of IPOs can dry up!

Experts feel that the fund might remain idle in the absence of IPOs, if the markets were to correct and enter a bearish phase.

However, Anand is optimistic as he says, "The IPO pipeline will dry up only if the macro conditions deteriorate and markets turn bearish. Not a correction but bearish. In such a situation this fund will be invested only in the index and hence will be better off as compared to other diversified equity funds."

5) Being close-ended, the investors may get trapped

Experts fear that if the strategy doesn't work, the investor would be trapped for at least 6 months. And even then, lose more on account of the exit loads.

Anand clarifies, "We believe that the visibility of the IPO pipeline remains strong at least for the next three 3 years. Hence this fund has been structured as a 3-year close-ended fund, which converts itself into an open, ended diversified equity on maturity of the scheme."