An Initial Public Offering (IPO) is an important event for a private company, as it is when the company becomes a publicly traded company by offering its shares to the public for the first time. For investors, an IPO can be a unique opportunity to be a part of a company’s growth story from its early public days, with the potential of making an attractive return. However, the direct investment in IPOs can be a challenging task for individual investors, owing to various factors such as the need for in-depth research, the inherent risks associated with new listings, and the competitive nature of the allotment process.
This is where IPO funds come into play and offer an alternative avenue for investors seeking exposure to IPOs. In this blog, we will discuss with you the IPO funds in detail.
What is an IPO Fund?
For new investors, the IPO process can be confusing. With IPO funds, investors do not have to go through individual IPO applications and worry about technicalities like ASBA (Application Supported by Blocked Amount). The fund manager pools the capital and bids for shares in the newly listed IPO stocks on behalf of all the investors.
These funds provide a diversified, lower-risk means of accessing newly listed high-growth companies. An example is Mirae Asset Mutual Funds, which offer Mirae Asset BSE Select IPO ETF and Mirae Asset BSE Select IPO FoF.
Why choose an IPO Fund over direct application?
In recent times, many investors are choosing to make investments in IPO funds as an alternative to applying for IPO applications directly because of the following reasons:
Bypassing the allotment lottery
In a standard IPO, the retail quota is usually limited to 35% of the total issue (leading to massive oversubscriptions in quality IPOs). Mutual funds, however, fall into the category of Qualified Institutional Buyer (QIB), which usually have reserved up to 50% of the total issue. Furthermore, top
AMCs are often participants as Anchor Investors.
Rigorous professional screening
Not all IPOs are goldmines, and many companies list at aggressive valuations just to cash in on euphoria in the market. An IPO fund relies on a team of professional researchers who evaluate the fundamentals of the company, perform the background check of the promoters of the company and assess the true financial health of the business and then make investments.
This institutional due diligence helps protect investors’ investments from fundamentally weak hype driven IPO listings.
Instant diversification
When an investor applies for a direct retail category IPO application, their funds of approximately Rs. 15,000 are locked in within a single company. And by putting the same amount of funds into an IPO fund, they get immediate, fractional exposure to a basket of 30 to 50 newly listed companies across different sectors such as healthcare, IT, and consumer goods.
However, since these companies are new, they can be volatile with limited history to compare their performance. They are suited for high-risk takers.
Conclusion
IPO funds can be a strategic choice for beginner investors in the Indian market to participate in the exciting yet complicated world of Initial Public Offerings without having to deal directly with the complexities themselves. They offer professional management, diversification and potentially higher allotment chances.
However, before investing, it’s important for investors to understand the risks associated with them.