The Hindu Business Line : What's special about a mutual fund IPO?

INITIAL Public Offerings (IPOs) are back in flavour in the stock markets. And this trend is spilling over to mutual funds, too. Between July and December 2003, fund houses have rolled out 22 new offerings, mopping up Rs 3,826 crore; twice the amount they collected in the first half.

In December 2003 alone, just six mutual fund IPOs raked in Rs 2,300 crore. This was much higher than the net inflows for all the 261 existing open-end funds, put together. These numbers exclude liquid, cash and gilt funds, which are usually not favoured by retail investors.

The trend is even clearer, when you consider the sheer number of investors who come in through the IPO route. Sundaram Mutual Fund added 22,000 investor accounts to its existing base of about 1.2 lakh, with just one Monthly Income Plan (MIP) launched in January. And Tata Mutual Fund is hoping to add one lakh accounts to its existing base of 2.2 lakh through Tata MIP Plus, a new fund which is now open for investment.

Why do fund houses roll out new products, when they could be promoting their existing ones? Mr Ved Prakash Chaturvedi, CEO of Tata Mutual Fund, says that Tata MIP Plus is being launched to address a felt need. "Our existing monthly income plan invests no more than 10 per cent in equities. But with debt returns on the way down, investors want a higher equity component. We wouldn't like to tamper with an existing product, which has been doing well. Hence, Tata MIP Plus," he says. But many IPOs are, in fact, clones of existing open end funds managed by one or the other fund house. So why would investors pour money into an untried product, when an open end fund with a readymade track record, is available on tap? Is it the same novelty factor, that makes you believe that a new brand of car offers better "value" than an old one? Maybe. But the hard-sell that accompanies an IPO certainly helps, feel sources from the distribution industry. For instance, many of the recent MIP launches were accompanied by road-shows outside of the major cities, where existing funds were not actively distributed. With the stock markets booming, this drew new retail investors, into IPOs.

Fund houses may also find it easier to incentivise distributors or launch a high-decibel ad campaign during an IPO, due to the more liberal limits on initial issue expenses. SEBI rules allow funds to spend up to 6 per cent of their IPO collections towards issue expenses, which can then be written off over five years. In contrast, when fund houses incur distribution and marketing expenses on their existing funds, they have to fit these into the 2.5 per cent annual ceiling allowed by SEBI, for recurring expenses.

For the fund houses, IPOs may also provide protection against a flight of assets. Some of the MIPs owe their success to "lateral switches" by existing investors. Investors who are already in the pure debt fund managed by a fund house have switched their funds into the MIP, in the hope that the equity "kicker", will help pep up their overall returns. This has prompted the fund houses which do not have an MIP in their basket, to line up an IPO, to fill this gap.