Explore IPOs safely through dedicated fund
Fund allocation to IPOs lies in the hands of the fund manager, who has successfully participated in many blockbuster debuts while sidestepping underperforming IPOs
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Investors often yearn for IPO opportunities, yet fear the uncertainty. Edelweiss Mutual Fund's dedicated IPO fund offers a solution. With careful selection and an average return of 14.12 per cent, this fund provides stability in a volatile market
The allure of participating in the latest Initial Public Offering (IPO) can be irresistible. Whether driven by marketing buzz or industry noise, IPOs often become focal points, especially in a bullish market. The presence of a Grey Market Premium (GMP) adds to the intrigue, reflecting the demand for an IPO. Amidst this noise, genuine interest in exploring new sectors or stocks emerges.
Investing in IPOs can feel like a game of chance, with allotment often boiling down to luck. High demand and subscription levels exceeding requirements can lead to chance allocation, dampening enthusiasm. Additionally, listings may not always occur at a premium, especially when broader market conditions cool or external events impact market sentiment, resulting in discounted listings and subsequent disappointment.
In recent weeks, a buoyant market has enticed numerous companies to venture into the public market. This frenzy has drawn participation from both individual and institutional investors, with mutual funds amassing over Rs 25,000 crore from various issues. However, data reveals that not all IPOs perform strongly upon listing, with approximately one-fifth of stocks trading below their issue prices, often due to lofty valuations.
For investors seeking to navigate the unpredictability of IPOs, Edelweiss offers a Mutual Fund (MF) option. Launched in 2018, this fund has had ample time to be evaluated, showcasing its investment thesis and performance. With around 80 per cent of its portfolio dedicated to recent IPOs, the fund operates with discretion, selectively participating in just over 40 per cent of IPOs since inception until October 2023.
Fund allocation to IPOs lies in the hands of the fund manager, who has successfully participated in many blockbuster debuts while sidestepping underperforming IPOs. Though it may not capture every big winner, the fund has achieved an annualised return of close to 21 per cent over the last five years, with an average return of 14.12 per cent since inception. In comparison, the S&P BSE IPO Index has delivered over 24 per cent return, making this fund seem underperforming at present. However, its convenience and ease of transaction remain attractive. While direct equity investment offers control over IPO selection and allocation, it also exposes investors to risk. Churn in the fund, even in the short term, does not impact individual investor taxation until redemption or exit. This presents a fantastic opportunity to build a diversified IPO portfolio, albeit without the autonomy of choosing specific IPOs.
Thematic funds can offer substantial upside when timed well. Edelweiss Mutual Fund's experience has yet to encounter a challenging equity season, aside from a brief period during the pandemic-induced lockdowns. It will be intriguing to witness how the fund performs, especially in terms of stock selection, during stress periods. Investors with a high-risk appetite and an interest in exploring IPOs may consider a staggered investment approach with this fund.
(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at [email protected])
