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Mutual Funds Investing in IPOs

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IPOs have become the buzz-word for anyone tracking the stock markets these days. With many known and several unknown firms getting listed, there is hardly anyone who is not talking about making money by investing in IPOs. But do you really know what IPOs or how you can make money by investing in IPOs?

What are IPOs?

Initial Public Offering or IPO, as its commonly known, is the first time when any privately-held company offers its shares to the general public to be traded on any of the stock exchanges. In a nutshell, an IPO is the route through which a private company goes “public”, to raise funds for various purposes. The IPO process involves an issuer (the entity whose shares are being listed), the subscribers (individuals / institutions who wish to purchase the shares of the issuer) and the banker (one or more investment banks who manage the entire process on behalf of the issuer).

There are two overarching reasons why you must consider investing in IPOs. One, they offer you a chance to invest in a new company which was previously not traded and two, IPOs generally offer you a one-time opportunity to make big gains by buying low and selling high. Despite these very obvious advantages, most people don’t usually have a great experience with IPOs. Some of the key challenges include:

  • As an individual investor, you will be given the least priority in an IPO. Generally, investment banks give preference to institutional investors while retail investors might or might not get the share for which they applied.
  • IPOs are typically riskier than publicly listed blue chips and can often be overpriced. As a result, they might list with a loss and destroy investor wealth.
  • Since they are unlisted, researching companies opting for an IPO becomes difficult.

And this is where mutual funds investing in IPOs can be a great option for you.

Do mutual funds invest in IPOs?

Yes, mutual funds invest in IPOs and can offer you a great opportunity to reap the advantages of investing in IPOs. As a professional medium for pooled investments, a mutual fund is in a good position to do the relevant research, identify the best IPOs, and then make the necessary investments. Further, owing to the large quantity of shares that mutual funds purchase, they also benefit from buying and selling at the right price.

Are mutual funds a better way to invest in IPOs?

Given the challenges that you would normally face in realising the true gains of investing in an IPO, you might be better off investing in a mutual fund that invests in IPOs. Some of the key benefits of this approach include:

  • No need to do in depth research and identify the IPOs that can potentially perform well over the long-term
  • Avoid the temptation of cashing out on listing day when you see huge gains and stay in the game longer based on the company’s potential.

Ability to get a bigger share of the pie by being invested via the fund rather than receive a small amount of shares as a retail investor.

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

All investment products carry risk and IPO investments are not immune to the same. Often, IPOs list at a lower price relative to the issue price which can erode your wealth. Further, in the short-term, stocks listed via IPOs can witness higher price fluctuations as the market is yet to identify their true fundamental value.

Should You Invest in IPO Mutual Funds?

Initial Public Offerings (IPOs) have always been an exciting opportunity for investors looking to participate in the early growth stages of a company. While many investors directly subscribe to IPOs, another way to gain exposure is through a mutual fund IPO. But is it the right investment choice for you?

A mutual fund IPO refers to a mutual fund scheme that primarily invests in newly listed companies or upcoming IPOs. These funds allow investors to benefit from a diversified portfolio of IPO stocks rather than investing in a single company. This approach helps mitigate risk, as not all IPOs perform well post-listing. For investors who want exposure to IPOs without the challenge of selecting individual stocks, IPO in mutual fund schemes can be an effective option.

One of the key advantages of investing IPOs through mutual funds is professional fund management. Fund managers conduct in-depth research before selecting IPO stocks, increasing the chances of investing in high-quality companies with strong growth potential. Additionally, since these funds invest across multiple IPOs, they reduce the risk associated with a single underperforming IPO.

Another important consideration is the liquidity factor. Unlike direct IPO investments, where shares may have a lock-in period, a mutual fund IPO provides liquidity as units can be redeemed based on the fund’s Net Asset Value (NAV). This makes it easier for investors to enter and exit their investments based on market conditions.

However, investors should also be aware of the risks involved in investing IPOs through mutual funds. Not all IPOs deliver strong returns, and some may struggle after listing. Additionally, the performance of an IPO in mutual fund depends on market conditions, sector trends, and the quality of companies chosen by the fund manager. Overall, a mutual fund IPO can be a good option for investors who want to diversify their IPO exposure while benefiting from professional fund management. 

Thus, you should keep in mind that while mutual funds investing in IPOs are a viable option, you must have a high risk appetite and should be willing to stay invested for the longer term, if you want to benefit from the growth potential of IPOs.



An investor education initiative by Edelweiss Mutual Fund 

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