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IPOs are No Lottery

Fund Managers stayed away from many of the smaller IPOs of 2003. Among all the eight IPOs, Maruti Udyog attracted maximum interest. The recently concluded IPO of Indraprastha Gas has just found favour among 13 schemes

The IPO fever doesn't seem to have infected fund managers too severely. In 2003, eight companies came out with their Initial Public Offers (IPOs) but mutual funds have only invested in few of them and in small doses.

This selective approach is in sharp contrast to the kind of overwhelming response that most of these public issues have received from retail investors. Most of these IPOs were over subscribed several times and their shares have been listed at huge premiums at the stock markets.

The recently concluded IPO of Indraprastha Gas, which got listed at a premium of over 91 per cent, has just found favour among 13 mutual fund schemes (excluding funds of UTI mutual fund due to unavailability of data). Magnum Balanced fund has made the highest investment in terms of its net assets - 3.32 per cent, followed by Deutsche Alpha Equity (1.97 per cent) and HDFC Balanced (1.92 per cent).

Among all the eight IPOs of 2003, Maruti Udyog has attracted the maximum interest among mutual funds. In all, 74 funds participated in the company's initial offer, which hit the Indian markets in June 2003. The second best company IPO for the Indian mutual funds in 2003 was that of Divi's Laboratories, in which 29 funds made investments. On the other hand, the initial offer of UCO Bank, which came in October 2003, only found value among four mutual fund schemes. The other IPOs of the year -- Radan Multimedia, Vardhman Acrylics, BAG Films and Jai Balaji Sponge -- remained outside the mutual fund investment universe.

Most investors regard IPOs as some sort of lottery. These are considered to be one of the best places in the financial markets to make money. This was widely evident during 1994 and 2000, when many IPOs hit the market. Most of the companies, which raised money in 1994 soon, disappeared. Though this has not been the case with the recent IPOs, but low mutual fund participation clearly shows the selective approach towads IPOs.

This is a good sign for the Indian mutual fund industry. After all, fund mangers are managing several small investors' money and have to take decisions on the merits of the offer. Diversification with a sharp eye on the stock valuations is the key to fund management. Even though they have long been seen as such, IPOs are no lottery.