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This Ain't No Lottery

A mutual fund IPO is not meant to try your gambling instincts. There is nothing to be gained out of investing in fund IPOs vis-à-vis an existing fund. Read ahead to find out why fund IPOs are not really lotteries.

Try as you may to deny it, but the fact is that somewhere deep inside every stock market investor, there is a gambler. And somewhere in the genetic makeup of every Indian investor is the belief that the most lucrative form of gambling on the markets, the nearest to a sure thing-as it were, is investing in an IPO.

They remember the years of picking up public issue application forms from pavements, queuing up outside banks to put down one's betting …..er investing amount, and then eagerly waiting for the postman to bring the allotment letter. Why, there was even a special banking instrument-Stock-invest-which was roughly similar in function to the chips you get in casinos. One could hardly blame investors for this attitude. Getting an IPO allotment really was like winning a lottery as IPOs routinely opened several times their offer prices.

The hold that IPOs (or 'issues', as they were called in the good old days before Americanisms took over our financial vocabulary) have on Indian investors is still a potent marketing device. Look at the phenomena of fund IPOs. Is there something to be gained by investing in these? Is there a rationale to the hundreds of crores of rupees, which are invested in fund IPOs?

We think not. Stocks are very different from funds. The price of a stock is based on its supply and the demand for it. IPO bonanzas happen only because when a stock opens, its demand is sometimes much larger than its supply.

There is just no equivalent of this in mutual funds. The supply of mutual fund units is unlimited, and in any case, your gains depend on how well the fund manager invests. In an equity fund, the first net asset value (NAV) depends entirely on how the market has moved in the time prior to the announcement. During the tech boom, many fund IPOs opened their NAVs with major gains.

Unfortunately, this strengthened the belief in IPOs. As technology shares moved up sharply on a daily basis, this movement was also reflected in the NAVs of existing funds. So the same 'IPO-like' results could have been obtained by investing in the funds that were already up and running.Another factor that encourages investments in fund IPOs is the belief in the power of par value or Rs 10. But there is no special sanctity in the value of the NAV. Fund NAV only reflects the aggregate value of the underlying instruments and how these change over time. As the par value is arbitrarily decided it might as well be Rs 6.37.

All things considered, it is generally a good idea to stay out of fund IPOs. A new fund is an untested entity without any track record. Your investment call will have to be made purely by looking at the fund manager and the AMC. Another problem is the possible opportunity loss. Your investments may be locked in for up to a month. This money could easily be kept in a liquid fund and put into the same fund when it opens for daily sales and purchase. Or at the very least, invest as near to the last date as possible to minimise the opportunity loss.

There are some exceptions to this. An obvious one is closed-end funds. Even though these are no longer in vogue, there are special funds like fixed maturity plans. If you would like to invest in one of these, the IPO may be the only channel available.

Investors should never forget that fund IPOs are purely a marketing device that creates some excitement. AMCs always communicate strongly during an IPO. A discerning investor should absorb this information carefully and invest later when the fund opens.