Rajat Mehrotra,
financial and economic experts
Today, Indian investors are faced with many opportunities as well as confusions. Almost every few days a new IPO comes into discussion, so mutual fund companies are entering the market with new NFOs. The buzz on social media about listing gains, gray market premium and multiple applications attracts investors. While NFOs are often considered a ‘cheap’ opportunity due to the starting NAV of Rs 10, the most important question amid the current global and domestic uncertainty is whether every new IPO and NFO is actually an investment opportunity? Or is the retail investor putting his hard-earned money at risk under the influence of market glitter and hype?
To understand IPO, first of all it is important to know the difference between Fresh Issue and OFS i.e. Offer for Sale. In fresh issue, the company gets the money raised by issuing new shares. It can be used for business expansion, new projects, debt reduction, technology, working capital or acquisitions. In contrast, in OFS, existing shareholders sell their stake and the money received from it does not go to the company. This doesn’t mean that every OFS is bad. Promoters or early investors may sell part of their stake after years, but if an IPO is primarily an OFS, the company is not getting fresh capital and valuations are already very high, the retail investor must ask – at what price and from whom am I buying this stake?
The same caution is necessary in NFO also. Many investors think that a new fund with NAV of Rs 10 is cheap, while an old fund with NAV of Rs 100 or Rs 500 is expensive. This assumption is not correct. NAV of a mutual fund is not a measure of whether it is cheap or expensive like the price of a share. What is important is what is the investment strategy of the fund, in which companies or assets it will invest, how much is the risk and how has been the performance of already available schemes in the same category.
The Indian mutual fund industry has grown rapidly in size and domestic investors have become an important market force. This is a positive sign of the growing importance of financial savings in India, but the growth of the industry does not guarantee that every new NFO is worthy of investment. New funds do not have their own performance history, so new themes, catchy names or loud advertisements alone should not be the basis for investment.
The current global circumstances make this caution even more necessary. Increasing tensions between the US and Iran, instability in West Asia and risks related to crude oil supply are important for India. India is largely dependent on imported crude oil for its energy needs. If oil becomes expensive, its impact is not limited to petrol and diesel only. Costs of transportation, aviation, paint, plastics, chemicals, fertilizers and many other industries may increase. Expensive oil can also put pressure on the rupee, inflation and the country’s import bill. The attitude of foreign portfolio investors has also not been consistent.
Global interest rates, the dollar, geopolitical tensions and valuations of Indian stocks affect foreign investment inflows, so it is not reasonable to assume that in every major downturn, foreign investors will immediately return to support the market. On the other hand, domestic institutional investments and SIPs are providing significant support to the Indian market. In such an environment, some mutual fund schemes may hold cash given market valuations and risk, but investors should understand that holding more cash is not always a weakness. Sometimes cash also provides an opportunity to invest at a better price in the future. Still, it would not be right to look at all fund houses or all schemes from the same perspective.
Now the biggest question is, what should the investor do? The first strategy is to avoid following the crowd. Don’t buy an IPO just because its gray market premium is high. Look at the company’s sales, profits, cash flow, debt, quality of promoters and competitiveness. Also understand whether the money raised from IPO will go towards the development of the company or mainly the old investors are exiting. Before investing in an NFO, ask whether the scheme really adds any new value to your portfolio. If there is already a fund available in the same category with a longer performance history, it is important to compare the two.
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