Why you must consider IPO

Why you must consider a fund IPOR Dharmarajan | August 25, 2005With mutual funds churning out new schemes, fund gurus will warn you to be careful.
Their rationale: Why invest in a new fund where there are good ones already in the market? Why venture into new territory when you know the old devils?
And, the Rs 10 spiel (you only pay Rs 10 per unit when you buy units of a new mutual fund scheme) does not hold much ground. Let's say you buy the units of two funds, one at Rs 50 and the other at Rs 10. If both appreciate by 10%, your net returns are the same.
On both counts, their logic cannot be faulted. However, what happened to me was the reverse.
My experience
I invested Rs 10,000 in an Initial Public Offering from a mutual fund - Sundaram India Leadership Fund - in June 2004. Being an IPO, I got each unit for Rs 10.
I simultaneously invested Rs 10,000 with an established fund - Sundaram Growth. This one's Net Asset Value was Rs 25.
Both investments were made in June 2004. Let's look at the Net Asset Value a year down the road.
Do note that all the NAVs and one-year returns mentioned below are calculated as on August 16, 2005. They are for the growth option of the schemes. To understand the difference between growth and dividend schemes, read The best mutual fund scheme for you.
Now, Sundaram India Leadership has an NAV of 17.66 and Sundaram Growth has an NAV of 40.10.
It is apparent, I benefit more from the IPO investment. And, when you take into account the fact that I have not accounted for the entry load in Sundaram Growth, it is obvious that the IPO was a better bet.
      Sundaram India Leadership     Sundaram Growth
Initial investment (June 2004)     Rs 10,000     Rs 10,000
NAV     Rs 10     Rs 25
Units bought     1,000     400
Investment value today     Rs 17,660     Rs 16,040
Profit     Rs 7,660     Rs 6,040
Some good IPOs
Let's say you had invested in a few IPOs last year.
You might have got higher returns if you planned on selling them this year than what you would have got if you invested in existing schemes.
Check out the returns you would have got from some of them.  
































This would have been more than the one-year return from some funds already established by then.
For instance, Birla Mid Cap (78%), Alliance Basic Industries (58.96%), Birla India Opportunities (50.05%) all have lower one-year returns than their newer counterparts above.
Hop onto the IPO bandwagon?
Not so soon.
I am not for one single moment implying that fund IPOs make better investments. All I am saying is that no hard and fast rules apply.
Do some groundwork before hopping onto the fund IPO bandwagon.
1. Do you like the concept of the fund? If it is a mid-cap fund, do you know what a mid-cap fund is? How risky it is?
2. Is it from a fund house that is reputable and trustworthy?
3. Has the fund manager managed other funds? How are they performing? Are you happy with his performance?
4. Is he a new fund manager? Then check to see how the fund house as a whole is performing.
Finally, when you do make your decision, do so on your terms. Not solely on someone else's suggestions.
Note: All the NAVs and one-year returns are calculated as on August 16, 2005. They are for the growth option of the schemes.  

Mutual Funds- SIP Investments why is it not always the best

Last year, July 2004 to be precise, I decided to take the plunge and invest in mutual funds.
All along, I had invested mainly in fixed return instruments. I felt it was time to opt for some more risk.

My banker told me that some of the diversified equity funds (mutual funds that invest in different companies of various sectors) had managed to deliver great returns.
And, like most advisors, he suggested that I invest via a Systematic Investment Plan.

Where an SIP scores
I have heard various proponents tout the other benefits of investing in a mutual fund via an SIP.
It is high on convenience.
All you have to do is give your bank a standing order to debit a fixed sum every month to the mutual fund house. And, that money is invested in the mutual fund of your choice.
Depending on the Net Asset Value (price of the unit of a fund), you will get units allocated to your name.
Also, this cultivates a savings habit. What does not come into your hands, you don't spend.
What's more, you avoid trying to time the highs and lows of the market and though you continue to invest even when the markets are very volatile, it evens out over time.

My portfolio
After being thoroughly convinced on what a great investment option this was, I shortlisted three of the top performing funds: Franklin Prima, HDFC Top 200 and Franklin Bluechip.
I decided to invest Rs 2,000 in each of them every month.

     NAVs on the day I purchased them
Month     Franklin Prima          HDFC Top 200          Franklin Bluechip
Aug 2004     78.95               38.84                    49.98
Sep     80.92               40.019                    50.92
Oct     95.79               43.9192               57.08
Nov     99.84               44.3959               59.68
Dec     107.19               48.2097               61.25
Jan 2005     115.26               50.3940               62.27
Feb     118.997               51.3857               62.28
Mar     116.10               53.220                    64.36
Apr     122.54               54.0010               66.81
May     126.530               54.9730               64.68

The time factor
From the above it can also been seen that rupee cost advantage is not true always with the SIP. As a lump sum invested on August 2004 could have given a better returns.
If I had invested a lump sum in all three of the above schemes on August 2004, I would have got much better returns. My returns would be around 56.5% in Franklin Prima, 50.3% in HDFC Top 200 and 33.7% in Franklin Bluechip.
Instead, my returns through SIP till May 2005 (if I average it out over time), stands at 31.2%, 15.2% and 23.4% respectively.
Despite what everyone says, it is not always wrong to time the market.
If I had invested during the time the markets slumped, say during January 2005, March 2005 or April 2005, I might have made more.
But, in an SIP, a fixed sum is invested on a specific date on each of the above months. If the NAV were higher on those days, you lose out on this advantage (because higher the NAV, the fewer the units you end up with).

The cost factor
Also, investors do need to take note that though there is no entry load on SIP, there is an exit load if you redeem (sell) you units within a fixed time frame.
An entry or exit load is a fee that is charged when you buy or sell the units of a mutual fund.
Depending on the fund, the time frame specified could be one or two years.
And this time frame starts not from the very first SIP but depends on each monthly investment.
Let's say the mutual fund gives you a lock-in period of one year. If you sell your units within a year of acquiring them, you pay an exit load.
So the investment you make in January 1, 2004, will be exempt from an exit load if you sell it on or after January 1, 2005. Similarly, for February 1, 2004, the time period will be till February 1, 2005.

The type of market
An SIP does not work in a bull market.
In as bull market, like the one we have now, when share prices keep rising, an SIP is not the best investment route.
In a rising market, then every subsequent SIP will be valued at a higher NAV and the average returns would tend to drop at every SIP.
In other words, you end up buying units at a higher rate.
So while your investment amount is fixed, the number of units you get keeps decreasing.

Your call
I have no intention of trying to prove that an SIP is a failure. Nor am I attempting to discourage potential SIP investors.
All I am saying is that there is no one surefire method of investing. Each has its own pros and cons.
You, as an investor, must weigh all possibilities when investing your money.
An SIP will work if you have a long time frame.
If you do not need your money in a hurry and are willing to ride the bear and bull phases of the market, then you should consider it.
I, for one, will continue with my SIP for it does have its advantages and one that is significant for me is that it cultivates a regular savings habit.

Dharmarajan R    

Hi, welcome to my random thoughts. Here I will psot some things which are random, though it may be useful to some one some where.