When mutual fund managers' calls go wrong
PremiumMF allocations to these new-age companies have rarely gone beyond 1% of the total assets of a particular scheme
Like retail investors, mutual fund houses have also been making a beeline for new age internet companies listing on Indian bourses. However, in most of the cases, recent bets have turned sour within a few months of the companies’ debut.
For example, the much-awaited ₹18,300-crore initial public offer (IPO) of Paytm was subscribed nearly two times, while the ₹9,375-crore worth IPO of Zomato saw bids of more than 38 times to its issue. However, both these companies have seen massive slump in share prices, leaving mutual fund houses holding these stocks in their schemes taking a hit.
Therefore, these fund houses have come under severe criticism from investors questioning their allocation strategy to new-age businesses that are usually still loss making.
Notably, some asset management companies have already trimmed their holdings or completely exited. Many are still holding their positions or even adding to their allocations.
View Full Image
An argument can be made in favour of mutual funds that allocations to these new-age companies have rarely gone beyond 1% of the total assets of a particular scheme. Therefore, even if a scheme holds 1% in a particular stock, and that stock goes down by 50%, it is going to impact the net asset value (NAV) by point 0.5% on the downside.
However, questions still remain on the thinking process of these schemes and reasons why funds had to trim their loss-making bets within a few months of their investments.
Prableen Bajpai, Founder, FinFix Research & Analytics
It is a bit harsh to judge the selection of a stock in the very short term
It is a bit harsh to judge the selection of a stock in the very short term. Some of the most successful businesses and sought-after stocks of today have had a rough start after their IPO (initial public offering) listings. Tesla is one such example. The company issued 13.3 million shares of common stock for the public at a price of $17 per share in 2010 and in March 2011, the shares of Tesla were sold at an opening price of $4.92 per share.
Many of the IPOs we have had in 2021 are new-age and internet-driven businesses. These companies offer exposure to unconventional and newer themes but at the same time are governed by different set of growth drives and risks.
And these dynamics at play make it hard to evaluate such stocks by conventional models. If some fund houses have taken a call to invest a small part in these businesses, then the decision is not necessarily bad.
Yes, the judgment by the fund managers has not been rewarded instantaneously, and even appears bad at this stage, but it is early to draw conclusions yet.
Suresh Sadagopan, Managing Director & Principal Officer, Ladder7 Wealth Planners
Criticizing managers just because some of their calls went wrong is unjustified
We invest in mutual funds because a fund manager, who is a specialist, is putting together a portfolio and continuously monitoring it. Here, we go into a fund fully trusting the fund manager to do their job professionally and with care.
MINT PREMIUM See All
There is every reason to believe that they do. Criticizing fund managers just because some of their calls went wrong is unjustified.
They keep looking at opportunities that come up from time to time and invest in stocks they feel are good fits in their portfolios. New-age startups focus on ramping up customers with scant regard to profitability.
Hence, a majority of startups have sky-high valuations but are bleeding. From that perspective, these are not stocks in which I will invest. But I keep hearing that new-age companies should be viewed differently and hence valued differently.
I have not yet understood this. For that reason, too, I would trust the fund management team to take considered calls on stocks which they feel should be a part of the portfolio.
Amit Kumar Gupta, Portfolio Advisor, Adroit Financial Services
Funds must explain their strategy of investing in new-age businesses
Mutual funds are expected to do due diligence before buying a position. In the case of Paytm, it was seen that some mutual funds schemes were allotted shares during the IPO. After the listing failed to enthuse and stock price declined, some positions were sold off as soon as the lock-in period of one month was over (as clear from November and December portfolio sheets). Key question to ponder over here is what really changed in the business prospects in one month? I would not take the extreme option of redeeming mutual funds units from such schemes but definitely would look out for similar action in the coming time as many of these new-age businesses will get listed over the course of next 18-24 months. I would like to know from the fund managers, what is the strategy while investing in a new-age business, and what will be the allocation strategy to these businesses (minimum/maximum allocation) and what’s the plan of scaling them up as more information becomes clear (profitability, free cash flow generation). Also, what will be the exit strategy and time frame to exit these holdings?
Never miss a story! Stay connected and informed with Mint. Download our App Now!!