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.