Wanted: A fund for investing

The number of companies looking to raise public capital over the next 18 months or so is mind-boggling.

P. Mukherjee | Print Edition: November 30, 2006

The number of companies looking to raise public capital over the next 18 months or so is mind-boggling. There is BSNL, Reliance Communications, Hutchison Max and Idea Cellular and a slew of PSUs. These issues could be looking to collectively raise more than Rs 50,000 crore. They would broaden and deepen the market sufficiently. Something like what Reliance Industries did a long time back.

How can the common man participate in this wealth creation exercise that’s around the corner? Generally, we invest in an IPO through the bookbuilding process and wait for allotment. But these are such eagerly awaited issues that oversubscription is likely to be substantial, despite their large sizes, and disappointment could be high. A good way to skirt the “problem” is to invest in a mutual fund scheme called the Standard Chartered Enterprise Equity Fund (SCEEF). A closed-ended scheme which becomes open-ended after three years, the fund’s objective is to invest a portion of its corpus in IPOs. The fund compulsorily sells the IPOs on listing.

What this scheme does for its investors is it takes exposure to the IPOs and because of its QIB (qualified institutional buyer) status, gets confirmed allotment and that too by paying only the 10% margin. Compare this to a retail investor who would have to pay the full amount and then not know how much is being allotted to her and then await her refund. With the mega issues in the offing an investor should sit back with the idea of making a windfall as and when they hit the market.

A fund like SCEEF with a better performance would be ideal to help the investor around the problem. The Nifty has gone up by 35% compared to the 12% rise in SCEEF’s NAV since inception. Clearly, its structure needs a tweak.

It is strange that other fund houses have not spotted this opportunity. But if they do think it is worth their while they would do well to look at the limitations that hinder the product. First, the investor’s exit route or rather the lack of it. Being a closed-ended scheme it could have been listed on stock exchanges to give retail investors an exit route. The periodic exit window would let off the investor at NAV-based price and it is safe to assume therefore that the quoted price would not be substantially discounted to the prevailing NAV. Further the idea of selling on listing takes away the fund manager’s elbow room in taking a call in the stock and/or the market. The over performance of the fund manager visà-vis the benchmark index is decreasing and would continue to do so as the markets mature. But that does not imply that his hand in the deal is totally redundant.

Hopefully, fund houses will take a cue and develop schemes to fill this gap in their product portfolios.

(By Prasun Mukherjee, CEO, Plexus Management Services)

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