Table of Contents
1. Morgan Stanley: Growth Fund 1994:
2. Is the IPO Mania necessary?
3. A Magical veil called ‘New’ Initiatives
4. Release of New Fund Offer (NFO)
5. Cryptocurrency Investment and New Risks:
6. Increase Of ‘New’ Strategies
Conclusion
‘Early offer,’ and ‘new to the market’ are terms used by corporates to sell their products. How are such advertisements used to influence an investor? Is it an opportunity or a risk to the investor?
‘Early Bird Catches the Worm.’ The meaning of this proverb is that you should rise early, and advance in life quickly. The corporate world has taken advantage of this idea and often introduces new schemes such as ‘Early Bird Offers.’ Many people often get stuck in them. But why does this happen constantly?
You should understand that the bird that rises quickly indeed catches the worm, but it is also true that the worm that rises quickly becomes prey. You think that you are catching the offer but the truth is that you get caught in the web laid by the corporates!
When someone says ‘New Initial Investment Plan,’ we find ourselves attracted to it without much thought. Is it a good strategy to invest in these new investment plans? Or are we getting stuck like the worm in the trap laid by corporates?
1. Morgan Stanley Growth Fund 1994
In 1994, this Growth Fund was introduced as a closed-ended fund for 15 years. Initially launched by an international firm, this fund was seen as a lifetime opportunity due to a misjudgment by investors. Many were captivated by this fund, and as a result, the initial application for investment attracted applicants who were lined up to 2 kilometers.
Similar to the excitement that surrounds the valuation of Initial Public Offering (IPO) shares, this fund also faced anticipation as it entered the market. The fear of missing out (FOMO), and the anxiety of not wanting to miss a potentially profitable opportunity, drove investors to participate in this new venture in 1994.
The Net Asset Value (NAV) of the fund, initially priced at ₹10, had a listing NAV of ₹8.98, resulting in an initial loss of 10%. As it was a closed-ended fund, investors were unable to sell it off immediately, leading to frustration among the initial investors.
The story for the first investors who stood in line, reminiscent of being early birds, turned out to be quite different than expected.
2. Is The IPO Mania Necessary?
Despite numerous well-performing stocks already listed and actively traded in the stock market, Initial Public Offerings (IPOs) remain a significant attraction for investors.
In 2008, Reliance Power entered the market with its IPO, releasing shares at ₹450 each. The IPO successfully raised an overwhelming ₹11,563 crores, oversubscribed by more than 70 times.
Based on different assumptions, investors believed that there would be an 80% immediate surge in the stock price on the first day itself. However, the excitement was short-lived, as the stock tumbled to ₹372.50 on the same day. Since then, the share’s value has not returned back to those levels. Even today, 15 years later, the IPO has not achieved its listing day price.
Reliance Power’s stock price, currently trading around ₹30, indicates a significant decrease from its IPO price. The IPO mania serves as a compelling example of how the initial excitement of investors can turn into disappointment.
Read this article “Factors To Consider Before Investing In IPOs” for more clarity.
3. A Magical Veil Called ‘New’ Initiatives
If someone at your home needs medical attention, which hospital do you prefer for an appointment? A new hospital or an old one with experienced doctors?
In which school do you prefer to enroll your children? Is it a well-established institution with a good reputation, or is it a newly started school this year?
Have you ever wondered, why you prefer experienced schools and hospitals, but when it comes to investments, why are initiatives labeled ‘new’ captivating you?
We generally respond positively to the term ‘new’ as it signifies improvement and a new opportunity. Many organizations use this term as an effective marketing strategy to appeal to us. This psychological approach has been used to mislead and influence investors by several leading corporates. Many significant flaws like the lack of a ‘performance track record with a proven history’ are concealed using this approach.
The ‘new scheme’ presents itself by concealing critical shortcomings of the investment proposal like a magical screen.
4. Release Of New Fund Offer (NFO)
When compared to the existing schemes in the Mutual Fund, many investors are more drawn toward the new fund offers. The reason given for this is that the Net Asset Value (NAV) of the new fund is usually ₹10, while in existing funds, it can be ₹20, ₹50, ₹100, and ₹200.
When you invest ₹10, you can acquire more units, making it possible to diversify. However, when you invest ₹100, you get fewer units. Therefore, buying new funds at ₹10 is more attractive to investors, creating a higher demand. Is this reasoning correct?
Net Asset Value (NAV) is only a denomination. Your investment amount is more crucial than NAV. If a person has ₹10,000 as 10 rupee notes, they will have 1,000 notes. Whereas, if another person has the same amount in 100 rupee notes, then he/she will have only 100 notes.
The key is not how many notes but the total value. Similarly, in the case of a low NAV, it is not important to buy more units but rather to focus on the overall value. How the Mutual Fund has performed in the past, its portfolio allocation, and the policies of the fund house are important.
In an NFO, you won’t find a track record or portfolio, then on what basis is an investor making the decision? Do you agree that it is not a calculated risk but a blind risk?
An investor should find a Mutual Fund that has at least 3 years of proven track record and further analyse it with various parameters before deciding to invest. In new fund releases, most of the time, there are no additional benefits, but only more risks.
5. Cryptocurrency And New Risks
With a new investment comes new risks; you must be cautious in your approach. Many faced significant losses after investing in cryptocurrencies in 2020 due to unforeseen circumstances. Regardless of who advocates for cryptocurrency, you should understand that no regulator, including SEBI and RBI, governs it.
The absence of regulation leads to higher possibilities of fraudulent activities, making it essential for investors to stand in a court of law to prove their point. Legal proceedings involve higher costs and can take an extended period.
The value of a share correlates with the company’s performance and activities. The value of the Indian Rupee is influenced by the country’s economic growth and falls and rises accordingly. On the other hand, the value of cryptocurrency fluctuates. But, what causes the rise or fall of cryptocurrency market? Is there any logical reason?
Fundamental questions remain unanswered. Then how it is possible to trust a new investment in cryptocurrencies? In India, 1.9 crore investors have ventured into cryptocurrency investments, and the majority have faced losses.
Lack of clear information and the allure of quick profits contribute to the risk associated with new investments. The fascination with the unknown and the subsequent risk is the primary reason behind many investors losing in cryptocurrencies.
6. Increase Of ‘New’ Strategies
We have seen that establishing a new trend in the market to attract investors and make them fall into their web has been a common practice by corporates for many years.
In the era of Harshad Mehta, the introduction of the “Replacement Cost Theory” in the market led to the manipulation of stock prices of some major companies. Ultimately, investors suffered losses.
In 1999 and 2000, a new trend emerged in technology-related stocks, and a new acronym TMT was created. TMT (Technology, Media, Telecommunications), representing three sectors, became popular. Several companies associated with these sectors saw a significant increase in their stock prices. This led to the birth of a new trend, and IPOs (Initial Public Offerings) with a focus on technology stocks gained popularity. However, many investors faced losses in the end.
In 2000, technology stocks experienced a major correction, and the enthusiasm for the new trend faded away. Common investors were also fooled by companies that just incorporated the word “technology” into their company names, trying to cash in on the trend.
The market witnessed a boom in technology stocks, and the word “technology” became a buzzword. Similarly, in 2020, a new trend emerged with ESG (Environmental, Social, Governance) stocks. ESG investing focuses on the sustainability and ethical practices of companies. Unlike previous trends, this trend does not promote excessive speculation.
Conclusion
Welcoming something new with open hands can be good for other aspects of life. But in investing, it is essential to consider both new and old strategies. Sound investment principles are the ones that rely on fundamentals, and ethical investment policies. They have always proven to be beneficial for investors. All of this will be more favorable for investors in the market instead of blindly following the trend.
Leave a Reply