Investors often tend to think of fund IPOs in the same vein as they do of stock IPOs. However, there are some fundamental differences that they need to take into consideration.
26-Oct-2004 •Research Desk
Investors often tend to think of fund IPOs in the same vein as they do of stock IPOs. However, there are some fundamental differences that they need to take into consideration. The price of a stock is based on its supply and the demand for it. IPOs often get listed at a premium because when a stock opens, its demand is sometimes much larger than its supply.
This is not true of mutual funds. In case of mutual funds, a separate unit is created at the time of investment and it is destroyed at the time of redemption. Thus, the supply of mutual fund units is unlimited and so any appreciation in the value of a fund's NAV can never be due to an increase in the demand for a fund's units. Moreover, in the case of funds, your gains depend on how well the fund manager invests.
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 issue is that of a possible opportunity loss. Your investments may be locked in for up to a month. This money could instead be kept in a liquid fund for a month and then invested once the fund opens for daily sale and repurchase post its IPO.
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 called fixed maturity plans, which are similarly structured. If you want to invest in one of these, then the IPO may be the only option available.
Investors need to understand 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 for sale and repurchase on an ongoing basis.