IPOs do not have a direct impact on mutual fund returns
18-Jan-2011 •Research Desk
In recent months, many IPOs have hit the markets and a lot more are in the pipeline. Does this impact mutual fund returns?
- Bhaskar Rao
There is no direct correlation between IPOs hitting the markets and mutual fund returns. More IPOs tend to hit the markets when the latter are trading at high valuations, as is presently the case. That is because promoters want the highest price they can extract from the sale of stocks in initial public offers. During a bull run optimism rules and hence investors are willing to pay more.
If you are interested in long-term wealth building, stick to highly-rated mutual funds. If you wish to invest in the stock markets, avoid investing in IPOs for listing gains. This is a speculative enterprise. Instead, invest for the long-term in secondary markets after researching the fundamentals of a stock and after making sure that it is reasonably valued. Stocks trading in the secondary market have a performance history. By comparison, much less information is available about IPO stocks. Fundamentally-guided investors should prefer the secondary markets.