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Have mutual fund IPOs delivered?

September 01, 2004 10:21 IST
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Currently the mutual fund industry is seeing a steady stream of IPOs (initial public offerings). A lot of investors are confused and cannot decide whether or not they should be investing in the IPO.

Many an investor, who had invested in IPOs over the last few months, is wondering whether he should be risking another IPO so soon. At Personalfn, we have done a study to see how some of the mutual funds IPOs launched in 2004 have performed till date.

In the beginning of 2004, we saw the mutual fund industry being overwhelmed with monthly income plans (MIPs). The fact that some fund houses already had MIPs in their portfolio did not stop them from launching another MIP, which gave birth to the 'MIP Plus' category!

On their part, investors took to the IPOs on the premise that a monthly income plan declares a dividend every month. Better investor education on the mutual funds' part and greater discretion on the investor's part could have averted the catastrophe that was to follow later.

The MIP Report Card

Monthly Income Plans NAV (Rs) 1-WEEK 1-MTH 6-MTH
RELIANCE MIP G 10.17 0.79% 0.76% 1.33%
HDFC MIP STP G 10.42 1.16% 1.01% 1.32%
SUNDARAM MIP G 10.14 0.85% 0.70% 1.16%
TATA MIP APP 12.34 0.84% 0.73% 0.78%
HDFC MIP LTP G 10.44 1.46% 0.92% 0.76%
PRINCIPAL MIP PLUS G 10.08 0.72% 0.88% 0.66%
TATA MIP PLUS G 9.99 0.85% 0.77% NA
FT INDIA MIP G 16.07 1.18% 1.30% 1.32%
DSP ML SAVINGS MODERATE G 11.86 0.66% 0.61% 0.93%
(Source: Credence Analytics. NAV data as on August 31, 2004.)

Some of the MIP IPOs have done reasonably well for themselves especially when compared to their accomplished peers. To give investors an idea we have pitched the MIP IPOs (shaded in grey) against two of the better performing existing MIPs.

Performance of the top 3 MIP IPOs in our sample has been steady and Reliance MIP (1.33% over 6-months) has outstripped FT India MIP (1.32% over 6-months). However, despite the strong performance of some of the MIP IPOs, they lost face when it came to declaring regular dividends, which was the 'investment objective' of a lot of investors.

Since these MIPs were recently launched and had not been able to build reserves over time, they could not declare dividends when equity markets crashed to 4,200 levels in May 2004. This rubbed a lot of investors the wrong way giving the entire category a bad name.

Then we had a wave of sectoral launches across the power, auto, pharma/health care sectors. Some fund houses like Reliance Mutual Fund and JM Mutual Fund that were not traditionally known for their penchant for sectoral funds, were in the forefront this time.

UTI Mutual Fund, which already had sectoral funds in its portfolio, could not resist another sectoral bout.

Other funds went the thematic way and we saw the T.I.G.E.R. (DSP Merrill Lynch Mutual Fund), India Leadership (Sundaram Mutual Fund), Global India (Kotak Mutual Fund), All Seasons (Standard Chartered Mutual Fund). Typically, such funds add lower value to the investor's portfolio and are meant to complement the existing plain vanilla equity/balanced/debt funds in the portfolio.

The Thematic Funds Report Card

DSP ML INDIA TIGER G 10.71 3.58% 1.23% NA
KOTAK GLOBAL INDIA SCHEME G 10.65 3.28% 6.40% 5.63%
HSBC EQUITY G 28.58 4.72% 4.50% 2.19%
HDFC EQUITY G 51.39 5.28% 4.32% -3.21%
SUNDARAM GROWTH G 26.10 3.42% 2.63% -3.51%
FRANKLIN BLUECHIP G 50.41 3.21% 1.55% -7.91%
(Source: Credence Analytics. NAV data as on August 31, 2004.)

Thematic funds don't have much of a history and it would be unfair to comment on their performance at this stage.

However, Kotak Global is one fund that catches the eye (up 6.40% in 1-month and 5.63% in 6-month). The fund invests in Indian companies with a competitive advantage at the global level. The performance of the other IPOs doesn't amount to much from what little we have seen and the established growth funds have done significantly better.

While fund houses will continue to beef up their existing portfolio of regular growth/balance/income with new offerings, investors need to exercise discretion to ensure that they select the scheme based on whether it is a good fit in their investment profile and offers a superior risk-return proposition.

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