What are Mutual Funds?
When it comes to investing there are numerous methods to invest your money, as per your expertise and skill set. Seasoned investors like to perform their own analysis and invest in individual companies. Whereas, new investors rely on other professionals to analyze and pick good quality companies to invest their money.
Mutual Funds are one of the best ways for beginners to invest their money into different asset classes like stocks, bonds, commodities, etc. Mutual funds accept money from investors and invest that into a variety of assets such as stock, bonds, currencies, gold, etc.
Every mutual fund is managed by a single or a group of skilled managers who are responsible for all the buying and selling of the securities within the fund. They analyze companies and select the best sector, asset class, or stocks to obtain the best returns possible for the investors. Mutual funds can be of multiple kinds depending on the investment theme. For example, if you want to invest in the Pharma sector, there are ‘Pharma mutual funds’ which invest in only Pharma companies. In the same way, there are multiple kinds of mutual funds, such as Hybrid funds, Large-cap funds, Equity funds, etc. Recently a new type of mutual fund is gaining traction in the Indian market, which is the IPO mutual Fund.
IPO craze in India?
The IPO (Initial Public Offering) craze seems to be gripping the Indian markets as most of the issues that have hit the markets have been hugely oversubscribed.
For those who do not know what an IPO is, let’s first get to IPO basics.
An IPO is a process through which a Private company raises money from the public by offering its shares. Post this, the company gets listed on the stock exchanges from where you can buy and sell the shares of the company freely.
More than 60 companies launched their IPOs in 2021 and more than 7 of them provided around 100% listing gains on the day of listing. Such high returns have stoked investors and the overall demand for IPOs has increased multifold.
However, the challenge faced while applying for an IPO is the allotment of shares. The shares are allotted on a lottery basis, hence it is extremely difficult to get allotment in most of the good IPOs.
Apart from this, even if you want to get exposure to multiple IPOs, you need to have a large amount to allocate into multiple companies.
What are IPO mutual funds?
An ‘IPO Mutual Fund’ is a type of mutual fund that invests in the recently listed IPO in the Indian markets. Currently, there are a couple of mutual funds that invest in IPOs. And as the popularity and demand for IPOs will increase, you will witness more funds launching their IPO funds.
Let’s look at the details of Edelweiss’s recently listed IPO fund which is one of the first IPO mutual funds in India.
The ‘Edelweiss Recently Listed IPO Fund’ is an open-ended fund where the minimum investment amount is Rs 5000. The expense ratio of the mutual fund is around 1.01%. The fund invests in the top 100 listed and upcoming IPO companies that are available in the Indian market. The fund made a debut in 2018 and has a diversified portfolio across all sectors which provides extended exposure and also lower concentration into a single company.
Advantages of investing in an IPO mutual fund
There are multiple advantages of investing in an IPO Mutual fund. Some of them are listed here.
1. Great Diversification
One of the most significant advantages of investing in an IPO mutual fund is the increased exposure to multiple companies. Ordinarily, investors invest in a handful of IPOs but when investing in an IPO mutual fund, you gain exposure to as many as 100 companies all under the same fund. This increases your allocation towards numerous types of companies and reduces your overall risk with the help of diversification.
2. Increased exposure with a small capital
When investing in IPOs, most of us have limited funds to allocate for an IPO. In order to invest in 5 companies, the minimum investment required would be close to Rs 75,000. This can be high for most small investors. However, with the help of an IPO mutual fund, you can start with as low as Rs 5000 and still be able to invest in almost 100 companies.
3. Professionally managed
Retail investors often look at news or rely on friends for investment advice. We have already seen that retail investors have lost a lot of money by investing in overvalued IPOs like Paytm, Zomato, etc. But when you invest in an IPO mutual fund, a dedicated fund manager analyzes the companies and only decides to invest if the company is good. This reduces the risk of getting trapped into fundamentally bad quality IPOs that could be highly impacted by market sentiments.
Should you invest in IPO mutual funds?
By looking at the following points, it is clear that investing in an IPO mutual fund offers numerous benefits like great diversification, exposure to multiple companies, professionally managed, high liquidity, etc. But on the flip side, you should be cautious while making such a mutual fund investment. The reason is, IPOs tend to be highly volatile, therefore a recently listed companies can witness selling pressure in the short term.
Additionally, when you are investing in an IPO mutual fund, you do not have the choice to increase or decrease the allocation towards a particular company. Henceforth, before you invest in any mutual fund, access your risk profile, perform your due diligence, and only then invest your hard-earned keeping a long-term approach.
Hi, I am Adam Smith, Admin Of TechSketcher, Creative blogger and Digital Marketer.