To invest in IPOs, you can also go the route of mutual funds.

IPOs fly quickly and investors are spoiled for choice. But with most IPOs oversubscribed multiple times, investors end up with zero allocation. For those who feel left out, there is another way to access the recently listed Edelweiss IPO fund. Is this fund worth adding to your portfolio?

The current IPO craze has turned the primary market into a lottery, especially for retail investors. The chances of getting an award in the Target IPO are slim. Those who get the award end up with a fraction of the requested actions. Since January 2018, IPOs with post-listing gains above 50% have averaged over 27 times of retail subscription. IPOs reaching between 15 and 50% earnings recorded almost 13 times the number of subscriptions on average. So many people would probably have missed out on these stellar gains.

Also, even if you get an allowance, the chances of hitting the jackpot are low. Successful IPOs are like betting on the draw. While several new listings created phenomenal wealth, many turned out to be duds. Since January 2018, 44% of new listings have recorded more than 15% annualized return. Twenty-two publicly traded small caps during this period became mid caps and four other small caps became large caps. At the same time, several new registrations fizzled out. Almost 31% of companies listed between January 2018 and October are currently in the red. Five mid caps turned into small caps after debuting on the stock market in 2018. Four small caps were suspended. Obviously, investors have to be very picky when investing in IPOs.

For investors who feel left out or unsure which IPOs to target, the recently listed Edelweiss IPO fund offers another avenue. This one-of-a-kind thematic fund was launched in 2018 as a closed fund, Edelweiss Maiden Opportunities – Series 1. It was converted to an open avatar at the end of his term in June of this year. As the name suggests, its sole mandate is to invest in companies that go public through IPOs. The icing on the cake is selecting 30-40 of the best ideas from among 100 recently listed and upcoming IPOs. Her top picks currently include Amber Enterprises, Sona BLW Precision Forgings, Gland Pharma, and Insurance.

Very few IPOs are worthy of investment

Oversubscription prevents many retail investors from entering

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Experts believe this vehicle offers a better way to participate in IPOs. Amol Joshi, Founder of PlanRupee Investment Services, says, “The allure of quick wins makes investors invest money in any IPO, which is a recipe for disaster. It’s best to let a mutual fund do the due diligence and eliminate the waste. Santosh Joseph, founder and managing partner of Germinate Investor Services, adds that investors have a much better chance of being exposed to a re-listing through a mutual fund vehicle. “A fund company is in a more advantageous position to secure allocation through the institutional IPO quota or anchor book subscription. Even if he goes missing, he can buy the shares at an appropriate time after the listing. ”

Another aspect that investors face when investing in IPOs on their own is the timing of exit. Most tend to withdraw immediately after signing up, missing out on any future earnings. Impatient investors often sell if the company takes the time to achieve the expected growth. “It is possible to make a lot of money even after listing because the earnings momentum of new companies can continue for a long time,” says Bharat Lahoti, fund manager, Edelweiss AMC. A longer holding period is necessary to fully seize these opportunities. A fund managed by professionals is better placed to do this. In addition, the fund’s portfolio is likely to have very little overlap with any existing diversified equity fund that you may hold. Traditional flexi-cap funds have on average less than 10% exposure to new listings.

What to watch out for

The fund has a solid track record of performance. It has generated annualized returns of 36.7% over the past three years, compared to 21.85% for the S&P BSE500 TRI. Still, given the very nature of the IPO market, investors should take this performance with a pinch of salt. Be aware of the risks that accompany IPOs. The fund has a clear slant towards the basket of mid and small caps, observes Joshi. Many of these companies have not been tested through economic and business cycles. Some newer tech-focused companies have yet to make a profit. This gives the fund a distinct risk profile compared to traditional diversified equity funds. Those who like a few selected IPOs can skip this route as investors have no say in the selection of IPOs in the fund.

Investors looking to mine quality IPOs in foreign markets might also find a convenient way soon. Motilal Oswal AMC has applied for a new fund: Motilal Oswal S&P US IPO & Spinoff ETF. This will allow investors to bet on new companies in the US markets. Experts say international exposure should preferably be in the form of diversified funds rather than thematic offerings.

About William G.

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