IPO, the most oft-heard three-letter acronym in the mutual fund business and its biggest draw is all set to walk into the sunset.
The market watchdog -- Securities and Exchange Board of India -- has objected in no uncertain terms to the practice adopted by mutual funds to term their new offering as 'IPOs' (initial public offerings). It believes this usage clashes with stock IPOs and confuses investors.
In our view, this was a move that was long pending. This is not so much to do with mutual fund IPOs as it is to do with stock IPOs. For quite some time now (since 1992 to be precise), stock IPOs have been a rage with investors.
Then IPOs were marketed by lead managers as a quick way to make money at the time of listing. Consequently, equities, a long-term investment avenue to build wealth, degenerated into an avenue to make a fast buck, akin to gambling.
Cut to 2005, equity markets are on a roll. Stock IPOs continue to roll out at regular intervals. And investors continue to look at IPOs as a means to clock anything between 5% to 100% return by the time the stock lists on the exchange! Truly, where else can you make that kind of money in less than a month!
Surely this is a 'malady' afflicting the stock investor that lead managers, investment consultants and even the regulator have been able to do little to alleviate. Nonetheless this malady remained restricted to stocks for a long time. And then it drifted to equity fund IPOs. The same acronym -- IPO, undoubtedly aided this phenomenon.
If we have to put a finger to it, it was the Morgan Stanley IPO in 1994 that instilled the notion that mutual fund IPOs were a lot like stock IPOs. Several investment agents/ advisors marketed Morgan Stanley on the 'stock IPO' premise.
This further cultivated the perception among mutual fund investors that mutual fund IPOs were a lot like stock IPOs.
Again as with stock IPOs, several misconceptions about mutual fund IPOs persist even today. Mutual fund investors still look at fund IPOs as a way to invest in a 'new' fund at only Rs 10 NAV!
For this reason, mutual fund IPOs are deemed better than existing funds with steady track records because the latter's NAVs are 'just too expensive'.
And unfortunately, mutual funds agents/distributors have done little to dispel such silly misconceptions because it helps them if the investor takes to IPOs as it keeps their commission counters ringing. Even fund houses have been mute spectators to these erroneous notions being propagated by agents.
Fortunately for the investor the regulator has come to his rescue. And ironically it took an old mutual fund hand to set the record straight. Mr. Damodaran, current Sebi chairman and UTI ex-Chairman, first 'announced' his presence by postponing the deadline for MAPIN registrations to December 31, 2005 from an unreasonable April 1, 2005 due date.
And now with the move to discontinue usage of the acronym IPO for mutual funds, once again you have the right kind of 'investor-friendly' signals emanating from Sebi.
'At par' was another objectionable term that confused investors into thinking that new mutual fund offerings worked like stock IPOs. In their IPO sales literature, some fund houses used to advertise issue of units 'at par', while many others used the term 'at face value'.
Both these terms are associated mainly with stocks.
The good news for investors is that fund houses have taken a cue from Sebi's announcement without waiting for an official diktat/notification. They have already started giving their offering a more 'mutual fund look' and you don't find terms like IPOs and 'at par' in their sales literature.
Of course, there is only so much that Sebi and fund houses can do, ultimately its your point of contact with mutual funds -- the mutual fund advisor/agent, who makes a lot of difference in making this communication work well.
If he is going to continue to talk of 'new fund offers' as mutual fund 'IPOs that are being issued at par value' then these announcements, like other announcements in the past, will mean very little.
From the investor's perspective, the disclaimer - 'buyer beware' still stands, which means he has to be aware of what he is getting into and not take the agent's word at 'face value'.
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