Indian investors have always been attracted by the allure of IPOs offering quick returns at listing and long-term wealth creation. An IPO, in simple terms, is when a company issues its shares to the public for the first time and sells it to the public.
The dilemma today for investors is whether to apply directly in IPOs or invest through an ipo fund. With the rise of thematic mutual funds focusing on new listings, the decision is not that simple. In this blog, we will explore whether to invest in an IPO by individual bidding or through an IPO fund.
Overview of IPO funds?
An IPO fund refers to a mutual fund category that principally invests in companies that are due for listing or have already been listed recently. Professional fund managers manage these funds after analysing the company’s fundamentals, valuations, and the industry outlook.
According to SEBI, mutual funds operate under the regulation that helps ensure transparency, risk management, and protection of the investor. This makes IPO funds a relatively structured way to participate in new listings.
IPO funds offer the benefit of diversification. Investors get exposure to a basket of companies across various sectors instead of depending on a single IPO. This mitigates the effect of an underperforming listing.
Overview of individual IPO bidding
The ASBA (Application Supported by Blocked Amount) process is most commonly used to directly invest in an IPO in India. It allows the investor to apply for an IPO without immediately debiting the money from the investor’s bank account. The money is only blocked in investors’ bank accounts and will only be debited if investors get an allotment.
At the same time, direct investing provides unparalleled control. Investors can select the companies that they would like to invest in and avoid those with weak fundamentals and aggressive valuations. While this can reap high rewards, it requires strong research capabilities and a willingness to accept higher risk.
Compare mutual funds vs direct IPO bidding
The comparison given below between IPO fund and direct IPO bidding will help investors assist in deciding which one is most suited to them.
Diversification vs concentration
IPO funds provide exposure to multiple companies, reducing risk. While direct IPO bidding puts investors’ investments into a single stock, it increases dependency on one outcome.
Expertise vs self-research
Fund managers in mutual funds analyse company fundamentals, valuations, and market conditions. In direct investing, investors have to themselves evaluate IPO prospects and financials to make investment decisions.
Allotment certainty
IPO funds invest money across various IPOs. However, retail investors often do not get an allotment in the desired IPO due to oversubscription.
Cost factor
Direct IPO investing involves no additional cost, unlike IPO funds, which charge expense ratios. However, poor stock selection can outweigh cost savings. You should compare mutual funds for this.
Risk & volatility
By spreading the risk, IPO funds are better bets for conservative investors, but they are still high-risk investments. Depending upon the listing performance, the direct IPO investments can either generate sharp gains or losses.
Which one should investors choose?
Investors should consider an IPO fund if.
- They don’t have time to analyse IPO prospects.
- They are seeking diversified access to fresh offerings.
- Seeking professional management.
On the other hand, investors should choose direct bidding when:
- They have an understanding of the company’s financial statements and valuations.
- Can handle volatility and uncertainty.
- Aiming for short-term listing gains.
Conclusion
The decision to choose between an ipo fund and individual IPO bidding entirely depends on the investment style of an individual investor. If investors prefer to have structured operations, then an IPO fund will be a suitable choice. However, in case they enjoy conducting research about companies and prefer to participate in high-risk, high-reward opportunities, then individual bidding in IPOs might be more attractive.
For most retail investors in India, a balanced approach can be adopted in which investors can participate in both IPO funds and individual IPOs. This can help them to have the discipline of a mutual fund and the thrill of direct market participation.