The Hindu Business Line : Mutual fund IPOs deliver, but established ones do better

INITIAL public offerings from mutual funds seem to hold a special allure for investors. Investors often shy away from funds with a proven track record, uncomfortable with their high NAVs, but are attracted to new funds selling units at `par'. But has investing in new funds really been a worthwhile proposition?

It has, if your main objective is to beat the stock markets. But your investment may have fared even better if, instead of the new funds, you had opted for an existing one with a good track record (and a high NAV!).

An analysis of the returns on 24 new equity funds (sector funds not included) rolled out since 2000 shows that the majority of these funds have comfortably outpaced stock market indices such as the Nifty till date.

New funds that have not yet completed three months have been excluded from the analysis.

Only two of the 24 funds have lost value, and as many as 14 of the 24 would have doubled your initial investment. Nineteen out of the 24 new funds have generated higher returns than the Nifty since the date of their launch. So, if your money would have otherwise been idle, you were probably quite right to invest in the IPO.

But on the other hand, you may have done even better if you had opted for an established fund with a good track record. For instance, while 19 of the 24 new funds have trounced the Nifty, just seven of them have managed to beat established funds in their category such as HDFC Top 200 Fund (for funds with a diversified stock profile) or the Franklin Prima Fund (for mid-cap funds), in the period since their launch.

The HDFC Top 200 Fund has been used as proxy for plain vanilla equity funds because of its broad-based portfolio that captures the BSE 200 basket. The Franklin India Prima Fund has been used to represent mid-cap funds. Both the Top 200 fund and the Prima fund would have been good investment choices if you selected your funds based on track record, as they have consistently beaten indices over a six-year period.

Among the new funds, HSBC Equity Fund, HDFC Tax Plan and Principal Resurgent India Equity have been exceptions, faring better than the established funds in their category. Investors in funds that have not yet completed a year of operations also need not despair, as any timeframe less than a year is not sufficient to pass judgment on fund performance.

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