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Herd mentality in fund IPOs

Aabhas Pandya

Call it the herd impact. The last one-year has seen asset management companies bombard investors with fund IPOs of the same hue on three different occasions. While it was balanced funds in late 1999, it was technology funds earlier this year and now AMCs are tapping investors with monthly income plans.

While investors have poured millions in the new offerings, unfortunately for them, returns from these funds have come a cropper. Is it a mere quirk of fate that the launch of these funds coincided with the markets coming under selling pressure or is it that whenever the fund industry will exhibit herd mentality, the products will fail?

"It is a combination of both bad market and herd mentality and products will definitely fail when there is herd mentality. If you see the number of issues in the market, then you can make out when the top will come and when the bottom will be reached. The market moves based on liquidity and if there is much of supply, than clearly the top will be reached quickly,'' says Nilesh Shah, chief investment officer, Templeton Asset Management.

However, Vivek Reddy, chief executive officer at Kothari Pioneer, disagrees and thinks that it is a mere coincidence and funds do not exhibit herd mentality. "As the Indian mutual fund industry is still evolving, it is natural for market players to launch a slew of products to offer a complete range to their customers. The last one-year has indeed seen volatility in equity and debt markets which has impacted performance. However, evaluating tech/balanced funds on the basis of one-year performance or less is not correct,'' he says. It may be pointed out that Kothari Pioneer has been one of the AMCs, which launched a fund on each of the three occasions.

Take for instance, the launch of as many as five balanced funds, which hit the market in less than three months in 1999 and collectively mobilised over Rs 10 billion. Since debt fund investors were beginning to feel the pinch of the 11 per cent dividend tax, AMCs targeted this segment with a balanced product, which did not come under the tax net as it had more than 51 per cent allocation to equity. The selling pitch was also backed by the slogan of "safer than equity with better returns than debt" to attract the conservative debt investor.

Today, all funds except Birla Balance are below par with negative returns nearly a year after launch. Even Birla Balance has managed to generate a return of only 6.83 per cent and is worse than even a conservative debt fund. As for tax-free dividends, there have been only two from Prudential and Kotak Balance but that's hardly comforting when investors cannot exit even with their initial investments.

"Whenever a number of funds are launched almost simultaneously, it generates a lot of hype and expectation regarding returns. However, if the funds fail to deliver, there is bound to be a widespread disappointment,'' says the chief marketing officer of a Bombay-based fund. "When products of the same type are launched in a short-span of time, the chances that they will generate poor return in the short-term are high. Given the nature of the Indian markets, which lack depth, funds with the same objective will end up chasing the same basket of securities. Unless the markets are in a long bull phase, the stock prices are bound to fall and hit the NAVs,'' he adds.

Investors have faced a similar disappointment in the case of technology funds, where all the seven funds are below par. On the other hand, as many as six MIPs have been launched this year. While it is still early days for monthly income plans, let us hope this bunch of funds does not disappoint investors.

EXCESS OF FUNDS IS BAD!

Balanced Funds
	Launch date	Latest NAV (Rs)
Birla Balance	Oct-1999	10.79
Prudential ICICI Balanced	Oct-1999	9.55
K Balance	Nov-1999	9.89
KP Balanced	Dec-1999	8.33
Sun F&C Balanced	Dec-1999	8.02

Technology Funds
	Launch date	Latest NAV (Rs)
Alliance New Millenium	Jan-2000	8.15
IL&FS eCOM Fund	Jan-2000	5.53
Prudential ICICI Technology	Jan-2000	5.43
KP Internet Opportunities Fund	Feb-2000	6.89
Sun F&C Emerging Tech	Feb-2000	6.22
K Tech	Mar-2000	6.45
DSPML Technology.com	Apr-2000	7.39

Source: Value Research

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