Caution is the Key

A food technology delivery platform company recently got listed on the Indian bourses at a mind-boggling valuation. The market capitalisation of the company after listing crossed Rs 1 lakh crore, which is much more than many of the leading public sector companies such as Coal India, BPCL, Indian Oil and others. Even highly established private sector companies like Tata Motors and IndusInd Bank do not command such market capitalisation. A study by Harvard University researchers published in 2019 notes that not every stock surge meets with disaster; those that do share some attributes.

These include increased share issuance, heightened volatility and a sector or index that doubles and is twice as high as the broader market. If not all, we can tick some of the check boxes in the current situation, which does not paint a rosy picture of the equity market in the medium term. It is not only the equity market that is witnessing such craziness from investors; even the mutual fund new fund offers (NFOs) are witnessing the same level of enthusiasm. A single equity-dedicated fund collected more than Rs 10,000 crore in its NFO, which till now was unheard of. More than 4,00,000 retail investors applied to the NFO.

Previous instance of such higher activity at the primary market level has mostly led to not so good returns from the equity market in the short to medium term. Therefore, caution is required on the part of investors before applying to any NFO. Even some of the hybrid funds that divide their funds into different asset classes based on the valuation of assets have seen funds shifting from the equity to debt portion. Therefore, investors should use their investment discretion carefully as not all NFOs might be appropriate for you. Our cover story of this issue goes deeper into this issue and analyses the historical NFOs and their performance. It will also guide you on selecting the right NFO and give tips on the ones you should avoid.

SHASHIKANT