New listings absorb a tenth of mutual fund flows this year

In the first nine months of CY2017, fund managers made net investments of Rs 89,000 crore in equities, of which Rs 11,300 crore was in recent listings

One out of every Rs 10 invested by equity mutual funds this year has gone into companies that have launched their initial public offerings (IPO) in 2017. 

In the first nine months of calendar year 2017, fund managers have made a net investment of Rs 89,000 crore, of which Rs 11,300 crore were in newly listed companies. 

While a large portion of the investment has been made at the IPO stage, fund managers have also added more shares to their portfolios after the listing. 

In the first nine months of the year, a little over Rs 30,000 crore was raised by two dozen IPOs.

Industry players say the new offerings have helped absorb the consistently high net inflows into equity schemes this year. Until September, equity mutual funds, including tax-saving schemes, have garnered net flows of over Rs 1 lakh crore. 

“Markets are trading at record highs and valuations are above long-term averages. Equity schemes have got an average Rs 15,000 crore a month this year. The huge flows are prompting fund managers to actively pursue newer opportunities. If these kind of flows have to chase existing stocks, it could create a valuation bubble in some pockets. So, it is positive this year has also seen steady stream of IPOs,” said a head of a fund house. 

New stock market entrants such as Avenue Supermarts, ICICI Lombard General Insurance, SBI Life Insurance, AU Small Finance Bank and Eris Lifesciences have seen the highest buying interest by mutual funds. 

Put together, these five companies alone cornered about 70 per cent or Rs 7,710 crore of the total investments in new listings. Till September, fund managers had brought in 22 new entities in their portfolio in the current year. 

“There have been some of the new entrants in sectors which were not well-represented in the stock markets. They make for good investment opportunities. This not only helps us deploy the strong inflows but also helps in expanding the investment universe,” said Mahesh Patil, co-chief investment officer at Birla Sun Life Mutual Fund. 

But, given the limitation of sitting on a large cash pile-up for long, they have been forced to look beyond their existing stock profile in an aggressive manner over the past few quarters.

Industry players said they are looking at new entrants proactively but at the same time are not going all out by investing in all companies.

Valuations, track record and quality of management are some of the aspects they are considering while taking investing decisions in new companies, they say. 

Patil said some of the recent offerings were aggressively priced, leaving little gains on the table for investors. 

Industry executives say if the markets continue to remain buoyant, there are more chances that the primary market may heat up even more going forward. 

Reliance Nippon Mutual Fund will become the country’s first fund house to launch an IPO next week. Fund managers say this is another new sector entering the stock market.

Foreign brokerage, CLSA, in a recent note said new equity issuances amid absence of foreign flows could weigh on the performance of domestic market, which could end 2017 on a “subdued note.”

“Equity issuances worth $4 billion (Rs 26,000 crore) could come into the market over the next three months. 

To support such high issuance, the Indian market will need the support of overseas investors.... With the expected weak trend in FII flows and continued high equity supply, Indian markets will likely end 2017 on a flattish/subdued note,” said CLSA in note earlier this month. 

Since August, FIIs have pulled out $4 billion from the domestic market.