When Standard Chartered Mutual Fund launched its Standard Chartered Enterprise Equity Fund last week, one thought how cool.
The Fund would only invest in Initial Public Offerings. And let's face it, everyone wants to be part of the IPO boom. In reality, not everyone gets an allotment.
So here you have someone doing it all for you. No need to get a demat account (if you don't have one), no hassle of filling forms or money blocked for allotment and then waiting for a refund if not allotted.
Read How to bid in an IPO to understand how the procedure works.
Before you sign the cheque for the Fund and hand it over to your agent, take a good look at what it attempts to deliver.
Money from IPOs!
What is the Fund's objective?
Rather straightforward actually: Buy IPOs and sell on listing.
And how will the fund make money?
When the IPO lists for trading, it is normally at a premium to its allotment price. So the difference will be the profit.
Will there be short-term capital gains if you sell the shares within a year of buying?
Yes in the case of individuals. Not in the case of a mutual fund.
What if there are no IPOs?
Are you kidding? The bull run has ensured that everyone is coming to the market to raise funds. In the next three years, there should be around 250 IPOs hitting the market. Now that is a lot of money!
So there you are dear retail investor, a great way to make money!
After all, if you want to participate in an IPO, chances are very slim that you will get an allotment. But the chances are better with this mutual fund.
Why you should bypass this fund
Talk to any mutual fund manager and ask them what investing advice they would give investors, it will generally follow along these lines:
"Investors must be prepared to stay in for the long term. To make money in equity, you must stay invested for at least three to five years."
Well, here comes along a fund that blatantly defies this rule. They are not going to be 'investing' in any stock. They are only going to be buying IPOs and selling on listing.
This is exactly what fund managers and financial advisors tell retail investors not to do. Because investing is not about quick gains, it is about staying in for the long haul and believing in your investment.
What the fund is expecting is that the IPOs will be undervalued and hence only logical that they will list at a premium. This is not a very likely scenario in this bull run. Generally, IPOs are underpriced in a bearish market (to attract investors) and overpriced in a bull market.
If not undervalued, then it is assumed that the market will move up benefiting the newly listed company. This is pure speculation.
Yet, the officials at this mutual fund house are quick to point out that they are not speculating but just making use of a 'market opportunity.'
Since it is not going to be a long-term investment, on what basis are they investing in stocks?
They are upfront about the fact that they will not be analysing the fundamentals, or looking at the sector or the growth prospects of the company. The clinching factor is that it must be an IPO. That's it!
So will they be investing in each and every IPO in the market?
Not in those that are less than Rs 10 crore (Rs 100 million) in size and those that do not have a Qualified Institutional Buyer reservation.
Moreover, if it is a pure debt IPO like ICICI bonds, they will steer clear. It has to be an equity IPO.
They will also look at the reputation of the promoter and see the IPO objectives of how the money will be spent.
And what is the guarantee that they will make money?
There is no guarantee but the logic rests on the trend that, in nearly all cases, IPOs list at a premium.
How cool is that?
Here's their rationale:
They studied 21 IPOs in Financial Year 2004, 21 IPOs in Financial Year 2005 and 60 IPOs in Financial Year 2006.
They calculated that if they bought these IPOs on allotment and sold within the first 10 to 15 days of listing, then the average return per IPO would have been 45% (2004), 39% (2005) and 35% (2006).
The highest and lowest return they would have made is 209% and -15% (FY 2004), 105% and -06% (FY 2005) and 211% and -16% (2006).
Is that not risky?
Well, I would think so but an official from the fund house was quick to refute that by saying historically IPOs always list at a premium so there really is not much risk.
"To run a fund on this criteria is like driving a car by looking into the rear view mirror," says Dhirendra Kumar, CEO of the mutual fund research organisation, Value Research.
Sure, IPOs have been listing at a premium but that is because of the bull run. It is no guarantee that this will continue to happen in the next three years. If the market takes a nasty turn and the bears send the bulls scurrying away, then this entire strategy could backfire miserably.
Naval Bir Kumar, MD, Standard Chartered AMC, says this fund, "aims to help investors take advantage of the increasing number of IPOs and seeks to harness potential premiums on listings." Do note, he said "potential" premiums. You can never be sure.
And even if good companies were coming up with IPOs, who is to say whether the fund will get its desired allocation?
In an IPO, 50% of the issue is reserved for institutions and out of this, only 5% is allocated to mutual funds. There are plenty of equity mutual funds who will also want to apply for a good IPO and be vying for a piece of this pie.
What is so enterprising about it?
My mutual fund agent called me to tell me about this "brand new concept" in the mutual fund industry. Obviously, he had not done his homework.
In the past, there have been two such funds with a similar agenda.
Since the fund is banking on the historical performance of IPOs showing a premium on listing, maybe we should take a look at the historical performance of such funds.
On April 4, 1994, the Sensex* was 3806 and climbed to 4303 on August 1, 1994. Within a year, by April 3, 1995, it was down to 3321. During this time, two such funds were launched.
On August 30, 1994, Taurus Newshare was launched with the aim of providing long-term capital appreciation by concentration of investments in the 'primary market'.
The idea flopped and the fund was later renamed Taurus Discovery Stock and the objective changed.
On April 4, 1995, UTI Primary Equity Fund was launched. The scheme aimed to invest at least 50% of its assets in 'primary equity'. This too failed and the fund was merged with UTI Opportunities on July 15, 2005.
On a closing note
This fund is based on numerous assumptions.
Primarily that the bull run will continue and that almost all IPOs will list on a premium. Further assumptions are that there are a huge number of IPOs in the offing and the fund will get a good allotment for every issue it applies to.
If you are willing to override these assumptions, then you could consider it.
But if you are considering an investment for just a short period of time, read the next lines carefully. This is a close-ended fund, which means you cannot buy and sell units any time you choose to.
You can buy units only during this time period when it is open for subscription (till May 16, 2006). And you pay no entry load.
Every six months, the fund will buy back units from those wanting to sell. If you sell within the first one year, you pay a load of 3%. It drops to 2% in the second year and 1% in the third year. After that, it converts to an open-ended fund (buy and sell units anytime).
Maybe I am cynical. But having said that, I must say, if something is too good to be true, it probably is too good to be true.
* Sensex figures are that day's high
