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Rediff.com  » Business » Fund IPOs: pause and pick

Fund IPOs: pause and pick

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September 09, 2004 07:01 IST

It is raining funds out there. Mutual funds have been falling over one another to launch new equity schemes over the past few months. And with exotic names, too.

Sample these: Core and Satellite Fund, Emerging Business Fund, Opportunity Fund, Discovery Fund, Leadership Fund, Multiple Yield Fund and Dividend Yield Fund - the last still awaiting Sebi clearance. All this in the span of a little more than two months.

This suggests that fund management companies are getting more innovative at least with names -- and it seems to be working. Equity mutual fund IPOs raked in more than Rs 600 crore (Rs 6 billion) with new launches during the two-month period when market sentiment was damp.

Funds come in all shapes and sizes. But if you are a mutual fund investor, you have to cut to the core. Names are no indicators of a fund's performance.

The key to successful mutual fund investment is to follow the old thumb rules: define your investment objectives, decide your asset allocation based on your risk profile, and give the fund manager time to perform.

Given the large data available on the past performance of various funds and managers, it is easy to get lost in numbers. Though it is easy to base investment decisions on good past performance, it is no guarantee of future returns.

To be secure, opt for a fund with a long-term track record and backed up by good management. The problem, however, is that many new fund products do not fit  into existing categories.

What's the difference?

While fund houses are trying to out-do each other in terms of new theme-based products, it is important for investors to understand the difference between a new launch and its peer group before investing.

The key question is how any given fund is different from others in the category. While most offer documents contain roadmaps to success, often the case is that they are as good or as bad as their competitors in terms of returns.

Let's take a few examples from newly launched funds.

SBI's Emerging Business Fund, an open-ended growth fund that's now open for initial subscription (the IPO closes on September 17), aims to "focus its investments in emerging business themes, primarily based on the export/outsourcing opportunities."

SBI Mutual Fund's chief investment officer N Sethuram says, "We will focus on sectors like textiles, auto, mid-cap pharma and power distribution, where the potential for growth is so huge that it can change the fortunes of companies that operate in those sectors can change dramatically."

However, the fund's sectoral exposure at any point in time will not exceed 25 per cent. It will also focus on emerging domestic investment themes.

Nothing wrong with that, except that the scheme -- when defined so broadly -- may not have anything new to offer.

Birla Mutual Fund's India Opportunities Fund runs on a somewhat similar theme.

The fund aims to "identify companies that seek to utilise India's low-cost and high-quality resources to service the needs of global customers."

Thus the scheme "allows investors to participate in India's emerging global outsourcing theme and seeks innovative ways of investing in only certain types of companies and sectors that have years of consistent growth ahead of them."

Kotak MF's Kotak Global India also has similar undertones. The scheme invests in "companies that have the ability to compete globally and deliver products and services that compete with the best in the world as well as in those that have a proven record of doing so."

There are those who are singing the 'swadeshi' tune, too.

ING Vysya Mutual Fund's Domestic Opportunities Fund, whose IPO closed on August 23, has plans to concentrate on domestic companies.

"The corpus of the scheme will be invested primarily in the equity shares of companies which derive significant proportion of their revenues from the domestic marketplace/economy," says the fund in its website.

But how is the scheme any different from the 80-odd equity diversified schemes in the country? No clear answers are at hand.

Take another example. The recently launched Kotak Opportunities Fund is a diversified equity scheme with a flexible investing style.

Here the fund manager will invest assets in sectors which he believes will "outperform others in the short to medium term."

According to the fund, its "specialty lies in giving the fund manager flexibility to act based on his views on the market."

That may not seem anything out of the world, but Ajay Bagga, chief executive officer of Kotak Mutual Fund, defends the scheme thus: "Kotak Opportunities is different in a couple of  ways. It allows you to have concentrated sectoral exposure. In other diversified schemes, you may find that the funds follow a sectoral exposure based on the BSE 100, the Sensex or the Nifty. So there is no concentrated portfolio exposure as such. Here we have the choice to invest up to 30 per  cent in sectors which we believe will perform well. Our exposure will be towards 30-35 scrips, with the top 10-15 stocks accounting for 50-60 per cent of assets," notes Bagga.

In sum, the fund will outperform only if the fund  manager makes the right call.

HDFC MF's Core and Satellite Fund (IPO closes on September 10) is among the new launches that caught the eye for its innovative sounding name and theme.

According to the fund, its primary objective "is to generate capital appreciation through equity investments in companies whose shares are quoting at prices below their true value."

Sounds like a fund with value investment as its theme. Is the name just a red herring then? Not quite. The HDFC product derives its name from the idea of creating a portfolio comprising 'core' and 'satellite' groups of companies.

"HDFC Core and Satellite Fund is a pure equity fund, but with a more transparent investment style in terms of portfolio," says Milind Barve, managing director of HDFC Mutual Fund.

"We will invest 60 per cent in a core group of companies which are likely to witness less volatility in prices but have a robust earning potential. Portfolio churning will be much less here. Core group companies can broadly be classified as large-cap companies," he explains.

According to Barve, the other 40 per cent of the portfolio will be invested in a satellite group of companies. "These will mostly be mid-cap stocks, though all wouldn't necessarily be mid-caps. These stocks carry a higher risk than the core group, but have the potential to give higher returns," he adds. But how does it differ from other equity diversified funds?

"A disciplined approach towards portfolio allocation is what sets the fund apart from other equity diversified funds," says Barve.

"While some funds invest 60 per cent of their assets in mid-cap stocks, they are not called as such. Similarly there are funds with a 80-90 per cent allocation to large-cap stocks, but allocations are not specified in offer documents. We have clearly stated that our allocation in core and satellite companies will be 60:40."

HDFC MF has also launched a Multiple Yield Fund. Though this will primarily focus on debt instruments, with 85 per cent of assets proposed to be allocated to that category, it will have a 15 per cent exposure to equity markets. But with a difference.

The debt portion of the scheme's portfolio will invest primarily in bonds maturing in around one-year's time, allowing the maturity of the fund to run down with time. This strategy would mean that the fixed-income portion should earn returns close to the yields on bonds over a one-year period.

Hence, interest-rate movements will have a minimal impact on the debt portion of the portfolio. According to the fund, equity investments "will be made primarily in moderate- to high-dividend-yielding stocks of well-managed companies that have sound records and where dividends are expected to be maintained or grow."

"Our equity exposure will basically be in companies which have declared dividends, but have not paid them out. So these will be cum-dividend stocks. So in a 14-15-month period (the proposed portfolio maturity period) you will be able to get two dividends. In other words, if the dividend is at 3-4 per cent, you are looking at a cumulative dividend of 7 per cent," clarifies Barve.

Quick on HDFC MF's heels, Tata Mutual Fund has also filed a prospectus with Sebi for its new scheme - Tata Dividend Yield Fund. An open-ended equity fund, it will invest in scrips with relatively high dividend yield. 

According to Ved Prakash Chaturvedi, chief executive officer of Tata Mutual Fund, the asset management company is carrying forward its tradition of giving monthly dividends at frequent intervals. Chaturvedi says a fund's record should be the primary reason for investing in its IPO.

"We launched the Tata Equity P/E Fund on May 17, 2004 (Black Monday). However, even though market sentiment has been damp since that day, the fund has done fairly well," says he. Tata Equity P/E Fund aims to invest at least 70 per cent of its net assets in shares whose trailing P/E ratios are less than that of the BSE Sensex at the time of investment.

Old is gold?

These new launches are leaving investors  in a quandary. While fund houses can and will justify the reasons for launching  new schemes, from a retail investor's perspective, it is difficult to understand the differences in the functioning of these schemes - if any.

According to the managing director of a leading retail investment firm, most new schemes are nothing but old wine in new bottles. "They merely indulge in window dressing," he says, adding that it's the brand name of a fund house that sells, rather than the new schemes' qualities.

One clue to safe mutual fund IPO investing may lie in that. According to market analysts, it is always better to trust an AMC which has given consistent returns in the past across many schemes and whose management style has stood the test of time. Also there is no need to invest in an IPO, unless you need the product in your portfolio. Only if the product is unique is it better to invest.

Chaturvedi cites several reasons as to why a fund house launches an IPO. "It could be a new product idea that could benefit investors," says he. But funds also launch schemes to fill gaps in their product portfolio. In this case, does it make sense for an investor to go for an IPO, especially if it is a plain-vanilla one rather than an already established scheme? The answer is no.

In short, go for a mutual fund IPO if it is unique and in line with your risk profile. According to Bagga, product innovations will drive the markets in the years to come, along with improvements in standards of distribution and service.

While it must mean a plethora of choices for the average investor, it is also easy to get blinded by the dazzle of new schemes which may be similar to existing ones with only cosmetic changes.

Investors should not be swayed by impressive ads and fancy names. The wise thing to do would be to trust the older schemes which have consistent records and have been tested under all market conditions.

Unique features

HDFC Core and Satellite Fund will invest in a portfolio comprising a 'core' group (well-established, large-cap stocks) of companies and a 'satellite' group (mid-caps with potential for high returns) of firms at a ratio of 60:40.

HDFC Multiple Yield Fund will invest 85 per cent  in debt and 15 per cent in equities. The debt portion of the portfolio will invest in bonds maturing in around one year's time, allowing the maturity of the fund to run down with time, thereby limiting the interest rate impact. Equity investments will be made in high-dividend-yielding stocks.

ING Vysya Domestic Opportunities Fund will invest in stocks which derive a significant portion of their revenues from the domestic markets.

Kotak Opportunities Fund allows the fund manager to invest higher concentrations in sectors he believes will outperform others.

SBI Emerging Business Fund focuses on emerging business themes, primarily based on export and outsourcing opportunities and global competitiveness. It also focuses on emerging domestic investment themes.

Tata Dividend Yield Fund will invest in the scrips that will have relatively high dividend yields.

Why you can afford to miss Fund IPOs

Even if you miss out on an IPO, it is not the end of the world. Here's why: unlike a corporate IPO priced at Rs 10, the par value of Rs 10 in a mutual fund IPO makes no difference to your return potential.

In the first  case you may consider yourself unlucky if you failed to get in at the IPO stage and watch the share price zoom to, say, Rs 50.

In contrast, in a mutual fund, the net asset value (NAV) of a scheme represents the underlying value of the assets held by the scheme and is, thus, irrelevant in terms of your return potential. Your returns depend on a scheme's performance from the time you get in.

In short, in terms of returns, there is no difference between investing in a mutual fund IPO and investing in an existing scheme. The difference, if any, would be in some special features, like whether it is a fund with no entry or exit loads, says Ajay Bagga of Kotak Mutual Fund.

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Sunil Nayanar
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