Can Mutual Funds Invest in IPOs

5 mins read
by Angel One

Through initial public offerings (IPOs), companies sell their shares to the general public for the first time. It’s essential to recognise that initial public offerings have distinct investor classifications, including Qualified Institutional Buyers, Non-Institutional Buyers, and Retail Individual Investors. Additionally, the allotment of shares in an IPO varies between different categories.

Individual retail investors, for example, receive a minimum of 35% of the shares in an initial public offering. It is necessary to note that ordinary investors can apply for securities worth up to Rs 2 lakh. Additionally, these investors are rapidly establishing themselves as key players in the stock market.

The initial public offering (IPO) is when a firm issues its shares on the stock exchange and becomes a publicly traded corporation. On the stock exchange, you can buy and sell the company’s shares.

Should you invest in initial public offerings via equity funds?

Numerous investors invest in initial public offerings (IPOs) to profit from listing profits. For instance, the initial public offering (IPO) price determines how a company’s shares are listed on the stock exchange. On the other hand, the listing price may be greater or lesser than the IPO offer price.

Profits known as listing gains may be earned if the listing price is higher than the offer due to significant demand for the shares. Many investors invest in IPOs solely to profit from the listing and exit the venture. On the other hand, financial experts recommend investing in the initial public offerings of well-managed companies and committing to the investment for the long term to maximise returns.

If you cannot select an acceptable initial public offering, you can participate in equity funds that invest the majority of their assets in initial public offerings. These are thematic funds that concentrate their efforts on a single investment theme: investing in companies that go public via initial public offerings (IPOs). You do not need to focus on due research because the thematic fund will select the finest initial public offerings and maximise your return over time.

Numerous individuals miss out on future benefits by selling their shares quickly after they are listed. However, thematic funds with high exposure to initial public offerings might maximise your earnings by holding the investment for a more extended period following the listing. Numerous newer businesses may benefit from earnings momentum, and mutual funds may invest in them for a more extended period.

Due to oversubscription, many retail investors miss out on IPO allocations in good, financially sound companies. The IPO allotment process is automated, and only a few lucky investors receive shares through the IPO. On the other hand, mutual funds can obtain IPO allotment via the IPO institutional quota or anchor book subscription. Additionally, mutual funds may purchase shares even after they are listed and sell them for a lengthy period to maximise investor returns.

What are the risks of investing in IPOs through mutual funds?

Thematic funds having substantial exposure to initial public offerings (IPOs) may invest in emerging enterprises and technology-driven companies that have yet to generate profitability. Additionally, these enterprises have not been subjected to economic and commercial cycles.

Thematic funds may outperform other stock funds in the short run, as initial public offerings (IPOs) can generate substantial profits in a short span. However, you should not invest in these funds just for the sake of short-term profits, as they are riskier than a large number of equities funds.

You should invest in thematic funds with solid exposure to initial public offerings (IPOs) only if your risk tolerance allows. It helps if you view initial public offerings as a long-term investment rather than a means to an end. In a nutshell, you could participate in initial public offerings through a mutual fund if you’re having difficulty selecting the correct IPO.

In November, mutual fund managers continued to spend extensively in IPOs (Initial Public Offerings). According to statistics compiled by Edelweiss Alternative Research, fund houses invested a total of Rs 4,050 crore in significant offers such as PB Fintech, Paytm, and Go Fashion. Nine firms raised capital through initial public offerings (IPOs) in November. Paytm’s Rs 18,300 crore offering — the highest ever for domestic markets — was among them Star Health Insurance, PB Fintech, and Sapphire Foods.

Demand for first public offerings

PB Fintech, the parent company of PolicyBazaar, was the best bet for the mutual fund industry in terms of initial public offerings. Mutual funds invested a massive Rs 1,350 crore in PolicyBazaar’s first public offering, followed by Rs 980 crore in Paytm and Rs 660 billion in Go Fashion, according to Edelweiss. Latent View Analytics, SJS Enterprises, and Tarsons Products are further IPOs in which fund houses have invested.

Paytm has not reached the issue price from the IPOs in which fund houses invested, despite poor performance after listing. According to Edelweiss Research, fund institutions such as Aditya Birla SL, BNP Paribas, Mirae, and HDFC Mutual Fund own Paytm stock. Axis, Kotak, DSP, SBI, ICICI Prudential, UTI, Invesco, HDFC, Franklin Templeton, and Motilal Oswal mutual funds, among others, own shares in PB Fintech.

What funds were purchased and sold

In November, Axis Bank was one of the most frequently purchased equities by fund managers. At the end of November, fund houses held up to 63.5 crore shares of the lender, an increase of 5.53 crore from the previous month. ICICI Bank and HDFC Bank were the banks’ second and third most popular stocks, with investors purchasing 4.37 crore and 94 lakh shares, respectively. Axis Bank’s stock price decreased 11.64 per cent in November, while HDFC Bank’s stock price fell 5.64 per cent.