With equity markets touching record highs, expectedly we are witnessing a deluge of mutual fund IPOs (initial public offerings).
The situation is fairly similar to the one experienced in 2003 (when monthly income plans were the season's flavour); however this time around fund houses are enticing investors with innovative offerings like multi-cap funds, mid cap funds and thematic (infrastructure, emerging business) funds.
So should you invest in a mutual fund IPO? The answer to that question lies in your risk-appetite, existing portfolio and what the IPO has to offer. If the offering is in tune with your risk-profile and more importantly if it can help you build an ideal portfolio, then investing in the same would make sense.
However, if the appealing factor is simply that it's a 'new' offering at an 'attractive NAV (net asset value)' of Rs 10, then you could be courting trouble. Investors would do well to resist the "temptation of new" as far as their investments are concerned
Let's analyse some of the IPO variants presently doing rounds and find out how well they are placed. Mid cap stocks have had a virtual dream run in 2004. At the same time, we also saw large caps do well intermittently.
To effectively position themselves whereby they can benefit from any which rally, fund houses have now woken up to the possibility of introducing funds that can move across market capitalisations, i.e. they can utilise prevailing market conditions by investing either in large cap, mid cap or small cap stocks.
However, funds of the opportunities and dynamic variety are in existence and they do precisely the same i.e. move across sectors and market capitalisations and invest in stocks that are the season's flavour.
More importantly they have a history to show for, which forms a reasonable benchmark to gauge what the funds are capable of performing going forward as well.
Infrastructure funds fall in the sectoral variety, which is typically a high risk-high return proposition, suited for well-informed investors.
Only investors who understand the intricacies of a given sector and have a view on the same should contemplate investing in sector funds. A variant from the sector funds category i.e. basic industries funds do exactly what infrastructure funds purport to do.
Furthermore if the infrastructure sector looks really attractive going forward, you can safely assume that even fund managers handling diversified equity funds will add stocks from the sector to their portfolio.
The disproportionate risk levels associated with investing in sector funds can be avoided by opting for a well-managed diversified equity fund.
Rank top-performing sector funds
Investments are a means to achieving certain pre-determined goals and MF IPOs are no different. There could be a state wherein existing funds from a given category have not performed well or are poorly managed; in such a situation an IPO with a similar offering from a reputed fund house could actually be a prudent choice.
As stated earlier, there is nothing wrong with investing in a MF IPO so long as it fulfills a given investment need, is in tune with the investor's risk appetite and acts as a vehicle for building an ideal portfolio.
However, investors must be aware that there is an element of uncertainty attached to investing in MF IPOs, which they must factor in before making an investment decision.
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