The lure of the primary markets has attracted the attention of mutual funds once again. After a two-year dry spell, there’s been a revival with a slew of mutual funds investing into the Initial Public Offerings (IPOs) of companies. As an investor, you may be curious to know where your hard earned money is being deployed by Asset Management Companies in the objective of wealth creation.

According to Prime Database, mutual funds accounted for Rs 1,100 crore of the Rs 1,800 crores of anchor investments in 15 IPOs in the 2015, which is around 61% of the anchor investments this year. Many big names in the mutual fund business have taken exposure to IPOs, while the top three fund houses - HDFC Mutual Fund, ICICI Mutual Fund, and Reliance Mutual Fund have invested approximately Rs 300 crore into IPOs this year according to Business Standard.

Comparatively, in 2007 the number of IPOs were 94 but the primary markets seemed subdued with only 6 IPOs in 2013 and 8 in 2014 respectively listed on the National Stock Exchange (NSE). The good news in 2015 is that 15 IPOs have been issued so far. Back then, companies were shunning raising capital from equity markets and preferred to look towards more risky sources of financing such as debt funds. However after a prolonged bull run, the environment is set for companies to turn towards equity financing again as retail and institutional investors have started participating in the primary markets. Now, one might ask the question, ‘Why are mutual funds suddenly attracted towards the primary markets?’

The Reasons May Be:
 

• The secondary market is trading expensive: The Price-to-Earning (PE) of Nifty stocks has been trading within a range of 20 to 24 times for the past year, which suggests stretched valuations especially in the midcap space where these have crossed a PE of 25 times.
   
• Some high quality stocks are yet trading at a premium: While money was being poured into the Indian equity market by retail investors, several high quality stocks are trading at high premiums. Since this money had to be deployed, mutual funds sought to invest it into the primary markets.
   
• Longterm investment opportunity: Mutual funds investing into primary issues are looking to benefit in the long term, while banking on the revival of the Indian economy.
   
• Substantial inflow in equity schemes: Following the rally in stocks, retail investors have started to participate in equity markets. Retail investors, who usually buy into the momentum, having witnessed a rally in equities are looking to step in.
   
• Assured allotments for anchor investors: Mutual funds are guaranteed allotments that reduce the risk of uncertainty. Also, anchor investors typically invest at the higher end of the price band and get assured of a larger quantity of shares
   
• Most IPOs have reaped the benefits for mutual funds: More than half of the companies that came out with IPOs this year are trading above par at present, with some mutual funds having reaped the benefits of investing into these companies.
   

Lastly, a lack of participation in the primary markets could have also been a result of a lack of trust by investors who continuously lost money, having invested in IPOs since 2011.

PersonalFN is of the view that a revival in primary markets only spells good news for India and could be seen as a foreshadowing of good things to come. In the same token, a revival in the IPO market will help companies raise the much needed capital to spur growth. Looking at the broader picture, evidence of a recovering economy is evinced by a vibrant primary market, but corporate earnings still have to pick up. Although there are nascent signs of growth with an increased performance of the Services sector, the manufacturing sector faces a lull.

As mutual funds are evincing interest in a slew of IPOs, an investment horizon of at least, say, three to five years becomes imperative to reap benefits. In this case, it’s detrimental to your financial health to hold a trader’s mindset and expect to make a quick return. Over time, it would be vital to evaluate how the mutual fund’s portfolio has performed. So, ensure you aren’t taking any decisions that jeopardize your objective of wealth creation.

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