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Do mutual funds invest in IPOs?

Dhirendra Kumar explains the stance of mutual funds on IPOs

There are many new IPOs coming in the market these days, do mutual fund managers invest in them? Also, there are many loss making internet-based companies who are launching their IPOs on a high valuation. What future do you see of this industry and will mutual funds invest in these companies?
- Ashish

Yes, mutual funds invest in IPOs but they do it on a selective basis. In the recent Initial Public Offerings (IPOs), mutual funds have not been seen investing big amounts. The last such popular IPO was SBI cards. That is because mutual funds have many options with them when it comes to investing.

These IPO companies need to be evaluated on various factors, such as, how the company is, its management and most importantly, its valuation. And usually it is seen that IPOs come at high valuation. So mutual funds invest in IPOs with a lot of caution and their approach here is like that of a common investor, as they usually put money for short to medium term.

Coming to the IPO of loss-making companies, earlier, there used to be a restriction in Indian market which did not allow loss-making companies to come with their IPO but that was changed later. I think fund managers are entrusted with your money to make the right decisions, considering that they would stay away from an unreasonably high valued company. However, sometimes it does happen that there is a trend and even these loss-making companies are in demand by the investors, which leads to an increase in their share price. But I believe that fund managers are experienced enough and would take prudent investment decisions with these companies.

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