The Mutual Fund Show: Betting On An IPO Frenzy
Mutual funds are usually considered as long-term investments. But asset managers have taken advantage of the initial public offering rush and valuation upticks.
Since funds can apply in the anchor book, they are willing to invest large sums, according to Juzer Gabajiwala, director, Ventura Securities. If the stock price jumps after listing, funds are happy to book profits, he said.
From among more than 40 asset management firms, at least five have applied for shares of at least 50 IPOs each in the last one year and total of more than 1,000 maiden offers, according to data shared by Ventura Securities.
Only half the schemes, however, held on to the IPO investments.
Rules do not bar mutual funds from booking short-term gains.
According to Gabajiwala, as long as the IPO frenzy continues, mutual funds will apply in maiden offers and take advantage of listing and short-term post-listing gains. That, however, may make valuations of newly listed companies unjustified compared to already listed companies, he said.
Watch the full show here:
Here are the edited excerpts from the interview:
While we talk about mutual fund investing being for the long term, in the primary markets it seems to be anything but long term.
JUZER GABAJIWALA: Yes, I mean we just saw that in the last one year, we have seen a spate of IPOs coming and hitting the markets, and we have obviously seen the retail interest rate spike and even the HNI component and markets—you have seen the way they have been. So, we just saw how the mutual funds are doing on the primary market. So, we just tried to do some analysis. So, we just realised that nearly, in the last one year we had some 35-36 IPOs, which came in, and we saw that nearly most of the mutual funds also participated. I think there were nearly 1,000 odd schemes where they invested in and the only thing is that 45% of those IPOs they've already exited because they have a minimum holding period of one month. So, I think it is the same thing what retail is trying to do at their end, trying to play the IPO market. I think, mutual funds are also trying to benefit the investors, by trying to use it. Some of them are even encashing and holding because they have a separate allotment which they get. So, that was just an internal study which we did.
Juzer, the key was when I looked at the data you've given—different scheme, different houses, Sundaram, SBI, Aditya Birla etc. It's very interesting that in so many of these cases, the number of exits, either equal to or at times is greater than 50 of the number of companies applied for which means that there is a clear pattern, mutual funds are consciously getting the allocation and then exhibiting it in a month's time. So, they're effectively doing the trading game as well, so to say?
JUZER GABAJIWALA: Or you can look at it the other way around like, it looks attractive to buy at a particular price and the way the premiums are getting commanded, so you might as well encash your profit. I think that what seems to be like. You would always have to evaluate in the stock market. So, at a particular price, if something is good to buy and if you expect that the stock price in one year, should let us say would be appreciated by 20% or 30% and if you get an appreciation in one month, then why would you want to wait for one year?
The stats are interesting one as to what are the different kinds of fund houses that are doing that and there's also a select set of companies in which there has been a high concentration of fund houses that exited as well. If I'm not wrong, Equitas, Mrs Bectors and Chemcon in that order—some very interesting figures. Can you talk a bit about this?
JUZER GABAJIWALA: We just tried to analyse and did a little bit of a deep dive, that which are the ones which were the top five in terms of percentage exits. We just saw that Equitas was one of them and had the top exit, then Mrs Bectors was purely on the FMCG space and then it exited, then Chemcon, then there are Indigo Paints and Burger King. These gave a good listing premium. So, I guess it looked good to encash out.
Juzer, is there a pattern into any of these? Would you believe that if the IPO markets stay as hot as they are right now, presumably through the year, then you might see more of this behaviour? As you said, people might not want to take gains, two, because there are certain gains on the table so the mutual fund manager is saying, why should I be dumb and say I'm only ‘long only’? I can make gains, let me gain so for my investors.
JUZER GABAJIWALA: Mutual funds, the benefit of having them is, they always will be having amounts available with them. They get their part of an anchor allotment, so they are able to do a good chunky allotment. I think that they have played it very smartly and I think investors have benefited out of it because if you see in the last 36 issues, nearly 72% of the issues have been at a premium and 28% have been at a discount. But I think the premium which has got commanded, has far outweighed the ones which were at a discount. What I've seen also is that some of the ones which opened at a discount were also quite judiciously avoided by the mutual funds. So, it’s not just how retail would be applying, they would just look at the what the premium is going on and then apply because the stakes are lower, and here the stakes are much higher. We have seen the amount of mutual fund interest even in the Zomato issue and at 76 and everybody is talking about it, that is one absurd valuation but the fact of the matter is, it is at listed at 125 because 130 is the rate and that’s a very good premium that you're making in one month's time. These type of returns you wait for a year in a particular stock.
I see more and more people getting sucked into and at times it's also a conversation done by the client by virtue of having heard it somewhere or otherwise, that let me invest in that fund and that dividend that you want to give me or at times the client gets sucked into it by wrong advice. Now, can you talk a bit about this dividend that is declared, and the way people go in for that believing that that's the Holy Grail.
JUZER GABAJIWALA: What happened is, if we maybe go back to around 2018, till that time dividends were tax free. So that was our biggest advantage which was there. So, we used to have something called as dividend distribution tax. So, the tax was being paid by the fund house, as far as the investor was concerned he was getting dividend which was tax free. So everything was quite hunky dory. Then we were also witnessing at one side that the fixed deposit rates were dropping. Interest rates were coming down, and people obviously are used to getting a particular amount of money. So, we have a lot of these balanced funds at that point of time. So, this balance is a hybrid with an equity type of taxation and a lot of people started investing over there because the dividend was tax free. The tax was still being paid by the mutual fund, that also not many people were realising, but since you are getting it tax free you are oblivious of the fact that somebody else is paying the tax—but the whole scenario underwent a change, effective April 1, 2020. The finance minister in the budget announced that now dividend is taxable. So that was a real change so previously the equity shares—they were also taxed provided the income exceeded a particular amount and even the mutual fund was tax free. After the announcement, now, you face two problems. One is that not only are you paying tax on the dividend income, but the second thing what will happen is that even your tax slab could undergo a change. So, to give an example, an investor was all along getting a good, hefty dividend amount and his taxable income was very low, let us say he was in the 10% or 20% tax bracket. So, he was earning seven-eight lakhs and he could be earning around seven eight lakhs by way of dividend, so his tax level also now changes. So, from 20% he will now come into the 20% tax slab. So, first of all, now he will start paying tax on the dividend. Secondly, what he would have been paying as 20% would be moved into the 30% tax slab and one needs to understand that in mutual funds, the dividend which is declared is more out of selling of shares. It is not like a company dividend, where the company's dividend is more determined by the amount of sale of the products. So, whether you get a capital appreciation or whether you get a dividend, at the end of the day, both are the same. So, for a dividend option to be in a mutual fund, according to me, it's not a very good decision and we have been trying to educate our customers across the board that it is extremely tax inefficient for you to stay invested in a dividend option today.
Juzer, if you were to look at three classes of investors one is a new investor, one is an existing investor and one is a seasoned investor into mutual funds. What is it that you reckon, their portfolio composition should be in order to derive the biggest bang for the buck, with the equity markets being where they are and the interest rates being where they are? And why?
JUZER GABAJIWALA: I am a very firm believer that for everyone there is a different way of investing. Specifically, right now, most of the people who have stayed away from the market mainly because of the view that right now with the Covid scenario we know it's going to crash and the whole thing is going to come down so as it is, we are in a very negative environment today and at the other side they are also witnessing that the markets are going up. So, suddenly they are seeing that everybody is talking that I made 20%, 30%, 40%, returns and small-cap funds have given these types of returns. So, there is a huge, you know FOMO factor — fear of missing out. My advice for new investors is that, don't try to look at trading, in fact, before I got into the call with you, I just spoke to one person who is new to the markets and said that I want to start trading. I think we have to be very careful specifically in a market like this and if you are a first-time investor, SIP is the best way to get into this. I am an absolute fan of SIPs, I've been doing it for the last 15 years, since the time I've started the mutual fund business and I realised the benefit of that and it is one product where you cannot go wrong.
For a new investor, the best and the simplest way is to start an SIP—whatever amount you're comfortable — do that in a large-cap fund, because that's the safest way, or now you have one more category where you can do it in a flexi-cap fund where you could have large mid and small caps and you don't have to bother about it.
I think that's the simplest decision, start off over there, slowly you start to get experience and you can start moving over there. That is my advice to a new investor. For the existing investors, you have some of the existing investors who would have tried a lot of things, some people would have tried to exit out or to time the market. I think that's extremely for a lack of a better word, foolhardy because, nobody has ever got it right in terms of trying to time the market. In trying to time the market you will always be 50% right or 50% wrong. There's no two ways to it. So why take the chance? If you have found that your schemes are not making good returns, follow a simple principle. For example, for them and specifically in today's market it is best to do an SIP rather than trying to put on money in lump sum because even I don't know where the markets are headed. Everybody is talking of an imminent correction, and we crossed 17,000 in a matter of less than a month. We went from 16,000 to 17,000 in less than a month. So, when the correction will happen, nobody knows, when the markets are going to top out, nobody knows. Investment is a journey, ride that journey, it will be a rollercoaster ride. Do not expect that it will be just a one way upward movement, with every rise you will also get a fall.
Existing investors can bifurcate money between a large-cap fund, maybe 50%, 30% in mid cap, 20% in the small cap, because we have already seen a reasonably good run up in the small cap and in the mid cap in the last year. So, I think this is a good bet.
Third, is where you have a person who is a seasoned investor, who has done everything and seen it all. I'm sure he must be doing his SIPs and all that. So, one thing what they can start doing at is, we have always looked at ourselves within but now we have to start looking at the outside. So, we need to start looking at international funds. It's a great opportunity, great instrument that you can start with even 5,000 and 10,000 and buy the Googles and Apples of the world and also the players which are not available over here. So, we are we are using all these products. Now we have an opportunity to also invest in these products.
You can pick and choose because now you have bought a lot of these options which are made available.
I just wanted one quick perspective from you. The news that came out, the NAVI Mutual Fund, which I think is Sachin Bansal’s unit has filed to SEBI for FOF feeding into the Vanguard Total Stock Market Index, and I think the map seems to suggest that if Vanguard’s expense ratio is 0.04%, SEBI rules will cap the combined FOF for just 0.12% which would mean extremely dramatically low expense ratios for any investor. Is this something that could change the expense structures available in the existing mutual fund landscape within India?
JUZER GABAJIWALA: I just briefly read about it, I don't know what the whole construct is about, but you also need to understand one thing that Vanguard has been there for a very long time as a fund house and we are talking about ETFs being very popular in the U.S. and everything, but it started gaining popularity, way later on. If I'm not mistaken Vanguard has been there for more than 40 years, and their ETF investing started getting prominence only in the last 10 to 15 years. The U.S. market is an extremely mature market. The size of the U.S. market, we are nowhere near it. Our Nifty 50’s market cap is equal to Apple, in fact even Apple has got a more market cap than the Nifty 50. So, we are talking about potential of what it is that is going to happen out here, how it is going to pan out, we can always have different data points for arguments in favour of ETF, in favour of actively managed funds so ultimately, the investor has to choose what is best for him. Your experience will be different from my experience. We could be buying the same fund but at two different points of time. So, it all depends upon each one's individual experience and choices.