This IPO fund puts 80% of its corpus in recently listed cos. Should you invest?

It isn’t easy for the common investor to get an IPO allotment. In the recent Bajaj Housing Finance IPO, 58 lakh investors applied for a single lot in the retail category but only 13 lakh investors got one. This meant few retail investors benefited when the stock price more than doubled on listing day.

Mutual funds, however, play by different rules. They can bid for shares under the qualified institutional buyer (QIB) category. Unlike with individual investors, allotments in the QIB category take place on a proportionate (pro-rata) basis. For instance, if a mutual fund applies for shares worth ₹100 crore in an IPO that is oversubscribed 100 times, it will be allocated shares worth ₹1 crore.

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This means mutual funds have a greater chance of getting an allotment than individual investors. Mutual funds can also apply for IPOs using the anchor book – a mechanism used to pre-allocate shares to large, institutional investors before the public offering.

Investors also can’t get a piece of the IPO action by investing in a regular scheme. That’s because almost all funds invest only a tiny portion of their funds in newly listed companies. After all, these have no track record as public companies and usually start out small, without a presence in a major index.

That’s where the Edelweiss Recently Listed IPO Fund comes in. For those looking to play the IPO boom, the fund will use 80% of its corpus to apply for IPOs and invest in companies that were listed recently. The remaining 20% is invested in other stocks. The fund managers decide which IPOs and recently listed companies to invest in, saving retail investors the hassle of choosing and applying for IPOs themselves.

How has it performed?

The fund has failed to beat the Nifty50 index since its launch in 2018. As of March 2024, it has returned 14.40% annually since inception, a shade below Nifty50’s 14.75% return. The five-year returns, however, show a different picture. The fund has returned 21% annually compared to Nifty50’s 15.3% return over the same period.

The fund tends to perform well when markets are doing well and there are a lot of IPOs. But it struggles to generate alpha (returns above the benchmark) when markets are struggling and there aren’t enough new IPOs coming up.

“Investors should have a minimum horizon of five years, and we advise them to invest in this fund through SIPs,” said Bharat Lahoti, fund manager of Edelweiss’s IPO fund. “The fund will continue to be volatile.”

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He added, “The IPO market works in cycles. You have a great cycle and then you have the bear phase. The year 2021 was a very good one for the IPO market, with 64 listings. In 2022 there was a lull in the IPO market and small- and mid-caps also did not perform well. Consequently, the fund also did not do well that year. But when the market started picking up in 2023, the fund outperformed the benchmark indices significantly.”

Nirav Karkera, head of research at Fisdom, said this fund would have a “relatively limited ability to perform during phases where there are no new IPOs” and “could typically underperform during a bear phase”.

Mint’s Take

While this fund provides a way for investors to participate in IPOs, most investors are still better off investing in a regular diversified scheme owing to the volatile nature of this one.

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