When Mutual Fund Managers’ Calls Go Wrong

For example, the much-awaited Paytm’s initial public offer (IPO) of Rs 18,300 crore was subscribed almost twice, while Zomato’s Rs 9,375 crore IPO received more than 38 times the bids for its issue. However, both these companies have seen a sharp fall in the share prices, which has affected mutual fund houses from keeping these stocks in their schemes.

Therefore, this fund house Investors have questioned his allocation strategy to new-age businesses, which are usually still making losses.

Notably, some asset management companies have already reduced their stake or exited altogether. Many are still holding their positions or even increasing their allocations.

One argument that can be made in favor of mutual funds is that the allocation to these new age companies rarely exceeds 1% of the total assets of a particular scheme. So, even if a scheme holds 1% in a particular stock, and that stock goes down 50%, it is going to impact the net asset value (NAV) downwards by 0.5%.

However, questions still remain on the thinking process of these schemes and the reasons why the funds had to reduce their loss-making bets within a few months of their investments.

Praleen Bajpai, Founder, Finfix Research & Analytics

It is a bit difficult to judge the selection of a stock in a short period of time

It is a bit difficult to judge the selection of a stock in a short period of time. Today’s IPO (Initial Public Offering) listings of some of the most successful businesses and in-demand stocks have got off to a bad start. Tesla is one such example. The company issued 13.3 million shares of common stock in 2010 at a price of $17 per share, and Tesla shares were sold in March 2011 at an opening price of $4.92 per share.

Many of the IPOs we have in 2021 are new-age and Internet-driven businesses. These companies offer exposure to unconventional and new disciplines but at the same time have a growth drive and are governed by different sets of risks.

And these dynamics in play make it difficult to evaluate such stocks by traditional models. If some fund house has decided to invest a small portion in these businesses, the decision is not necessarily a bad one.

Yes, the decisions of fund managers have not been rewarded immediately, and even seem bad at this stage, but it is too early to draw conclusions now.

Suresh Sadagopan, Managing Director and Principal Officer, Ladder7 Wealth Planner

Criticizing managers just because some of their calls went wrong is unfair

We invest in mutual funds because a fund manager, who is an expert, is building a portfolio and constantly monitoring it. Here, we go over a fund that completely trusts the fund manager to do his job professionally and carefully.

There is every reason to believe that they do. Criticizing fund managers just because some of their calls went wrong is unfair.

They look at the opportunities that come up from time to time and invest in stocks that they feel are suitable in their portfolio. New age startups focus on increasing the number of customers in terms of profits.

Hence, valuations of most startups are skyrocketing, but they are suffering. From that perspective, these are not stocks I would invest in. But I keep hearing that new age companies should be viewed differently and therefore valued differently.

I haven’t understood this yet. For this reason as well, I would trust the fund management team to consider the stocks they feel should be a part of the portfolio.

Amit Kumar Gupta, Portfolio Advisor, Adroit Financial Services

Funds should articulate their strategy for investing in new age businesses

Mutual funds are expected to exercise due diligence before buying a position. In the case of Paytm, it was observed that shares were allotted to some mutual fund schemes during the IPO. After the listing failed to excite and the stock price plummeted, some positions were sold as soon as the one-month lock-in period ended (as evident from the November and December portfolio sheets). The important question to consider here is what exactly has changed in business prospects in one month? I will not take the extreme option of liquidating mutual fund units from such schemes but will definitely look for similar action in the times to come as many of these new-age businesses will get listed during the next 18-24 months. I want to know from fund managers what is the strategy while investing in new age business, and what will be the allocation strategy for these businesses (Min/Max Allocation) and plan to grow them as more information becomes clear (profitability, free cash flow generation). Also, what would be the exit strategy and time frame from these holdings?