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Suresh Krishnamurthy

THE sizzling debut of Maruti Suzuki is a sign of the ring of confidence enveloping the primary market. Maruti's listing follows a string of successful offerings, mostly from banks.

After a long time, public offers are offering retail investors a lucrative way to make money in a short period.

However, the best way to play the market revival is through the mutual fund route — that is, through actively managed mutual funds. For retail investors, that holds better potential to build wealth in a sustainable manner.

Spate of offers: Starting with Punjab National Bank in April 2002, the primary market has seen many successful offers, such as those from i-Flex Solutions, Canara Bank, Divi's Labs and Union Bank of India in the last 18 months. Interestingly, a number of attractive public offers are in the pipeline.

Investors will have the opportunity to invest in offers of large companies such as Tata Consultancy Services, BPCL, National Aluminium and Bharat Aluminium.

Public offers of smaller companies such as CMC, Indraprastha Gas, IBP, Vijaya Bank, Indian Overseas Bank and UCO Bank are also scheduled to hit the market. In the next decade, investors may have the opportunity to invest in companies such as BSNL, NTPC, Oil India and even companies such as Coca-Cola, MsourcE and Spectramind.

If these offers were attractively priced, investors would continue to have profitable opportunities to flip a stock. Flipping a stock involves investing in a public offer in order to sell the stock on listing.

Investors would continue to make money, but will they build wealth? Building wealth involves diligently reinvesting the profits, and funds appear more suited to a retail investor on this score.

Advantage funds: In every public offer, allotments are made to both institutional investors and retail investors. Institutional investors, such as actively managed mutual funds, know how much can be invested in a particular offer.

Retail investors may not know. They probably might invest all of their money in a particular offer. Or, they might get allotments only for a few hundred shares. Some might not even get any. Funds are allotted sizeable proportions in a public offer. It offers all retail investors opportunity to participate in such public offers.

In addition, retail investors may not be able to participate in all the public offers. For example, investors may have had the money to invest only in Maruti Suzuki. They may not have the liquidity to participate in other forthcoming offers.

Mutual funds, on the other hand, participated in all the lucrative opportunities of recent times. Once again, they have emerged as a better way to gain exposure to all the good offers the primary market throw up.

Importantly, they are also in a better position to reinvest the profits. Some investors might fritter away the gains by investing in risky and volatile stocks. Some might turn out to be excessively prudent and invest the gains only in risk-free securities, earning a meagre income.

Many may not even sell at the right time. Very few would sell and re-invest the money in securities or manage their portfolio to build long-term wealth. Fund managers have a reasonable performance record in this respect. They appear better at building wealth than investors themselves.

Benchmark to a fund: It is not that investors should shun direct investing altogether. Direct investing has been provided a fillip by changes in tax laws. Investments in a mutual fund are subject to not only entry loads and annual expense charges but also an applicable long-term tax rate of 10 per cent.

For direct investments made between March 1, 2003 and February 28, 2004, the applicable long-term tax rate is nil. So, direct investing does hold an edge, provided investments are made prudently and appropriately. Very few can achieve that.

It would be prudent to invest a larger proportion of what you have with mutual funds. Investment can be made in former Pioneer ITI and Zurich India funds, now forming part of Franklin Templeton and HDFC Mutual Fund respectively. A smaller proportion can be invested directly.

Match your performance with that of funds and find out who is doing better over two to three years. Many are likely to fare poorly. The skilful few can continue to strike out on their own. Others will see the need for actively managed mutual funds.

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