An enterprising fund

NFO REVIEW

Standard Chartered's Enterprise Equity Fund is the only fund with a specific focus to invest in new issues.

In bull markets, when IPOs get huge listing gains, a mutual fund that invests exclusively in new equity issues was just an idea in waiting. With the launch of Enterprise Equity Fund, Standard Chartered Mutual Fund has launched a unique three-year closed-end equity fund that aims to invest in IPOs.

It will automatically become an open-ended equity fund on completion of three years. The fund will not hold stocks but will sell it either on listing or within the first 15 days of trading. This is because the fund aims to help investors take advantage of the increasing number of IPOs and benefit from the potential premium on listing of IPOs.

"Over the last 15 years, it has been seen that about 70 per cent of IPOs are listed at a premium," says Kenneth Andrade, fund manager for Enterprise Equity Fund.

There have been two other funds with an investment focus on IPOs in the past. In 1994, Taurus Newshare was launched with a mandate to invest in IPOs, while UTI Primary Equity Fund was launched in 1995 with an objective to invest at least half the corpus in IPOs.

But as the flow of IPOs dried up when markets went down, Taurus Starshare changed its investment objective and became a diversified equity fund, while UTI Primary Equity Fund was merged with UTI Opportunities Fund.

Due to the over-subscription in most IPOs, retail investors do not get enough allotment. Also, due to the time gap between applying for an IPO and getting a refund on shares not allotted, investors lose out on applying in other IPOs. If the investors go the mutual fund way, they get an opportunity to invest in multiple IPOs at the same time.

Further, mutual funds have a good chance of allotment as 5 per cent of the institutional allotment portion is reserved for them. The fund is attractive from a cost perspective too.

"The investor can avoid the short-term capital gains tax that he would have had to pay if he were to sell the allotment on listing," says Naval Bir Kumar, managing director of Standard Chartered Mutual Fund.

And above all, this fund gives investors the lazy choice of not filling application forms and opening demat accounts. All these reasons make it more convenient as well as more lucrative for investors to go through the mutual fund route rather than investing directly.

With a large number of companies waiting to enter the market, the fund will have plenty of investment opportunities.

"The pipeline of IPOs seems robust and strong with more than 200 companies coming out with IPOs in the next two-three years," says Naval Bir Kumar. "The fund is sensitive to the number of IPOs, larger the number, better the returns," he added.

Having the basic objective of investing in IPOs does not mean the fund will invest in every IPO. The fund will invest only after proper due diligence - check the management track record, visit the plant, meet the management.

"We will not invest in penny stock IPOs and also in those IPOs that do not have a QIB (qualified institutional buyers) reservation," says Kenneth Andrade. "Also, we will not invest in any greenfield project as due diligence is not possible, which increases the risk," he added.