This mutual fund scheme invests only in recently-listed IPOs. Should you invest in it?

Edelweiss Recently Listed IPO Fund, a 3-year closed-end scheme, is now open-ended. The scheme would invest in 100 recently-listed IPOs

June 02, 2021 / 01:08 PM IST

Edelweiss maiden opportunity Fund series -1 (EMOF) has been converted into an open-ended fund from being close-ended earlier. The new scheme is named as Edelweiss Recently Listed IPO (ERLI). Existing investors of EMOF have the option of exiting at the prevailing net asset value (NAV), without exit load, from May 28 to June 28, 2021. Investors who wish to stay on will automatically get their units converted to the open-ended scheme. The conversion will take place on June 29, 2021.

What’s on offer

EMOF was rolled out in February 2018 and the scheme was to mature on June 28, 2021. It has given 15.59 percent returns since inception and has assets under management of Rs 522 crore. Being a close-ended fund so far, it used to invest in IPOs – initial public offering – of stocks. Now, after becoming an open-ended fund, it would invest in 100 recently-listed IPOs. The scheme will invest at least 80 percent of its assets in such stocks.

The fund sports a reasonably diversified portfolio and has 39 stocks of companies of all sizes and across sectors. Only two stocks – Dixon Technologies (6.98 percent) and L&T Infotech (5.02 percent) – have allocation of more than 5 percent, as on April 30, 2021.

What works?

Close

The mirage of listing gains makes retail investors chase IPOs. In a bull market, there are many IPOs and investors have no time or resource to analyse offers. A scheme such as ERLI can help choose the right stocks. The fund can continue to hold on to these stocks, way beyond their listing days.

“Many retail investors sell on the listing day to earn capital gains. However, good businesses continue to do well irrespective of the listing gains they offer. Fundamentally strong businesses, if held for the longer tenure, can be rewarding for investors,” says Niranjan Avasthi, Head-Product & Marketing, Edelweiss Asset Management. “Our average holding period for this scheme has been around 24 months,” he adds.

Many recently listed IPOs offer exposure to high-growth sunrise sectors. Focusing on them can be rewarding. EMOF has done well in the past three years, better than the 12.25 percent returns given by flexi-cap schemes, on an average, as per Value Research.

What does not work?

Though there is a room to invest outside the IPO stocks universe (up to 20 percent of the assets), the set of 100 recently listed IPOs is restrictive in nature for a scheme with a flexi-cap approach. In a bull phase, IPOs may be over-priced and the fund manager may be forced to choose from them, given the scheme mandate. In a bear market, there may not be enough IPOs. Some experts say the focus on IPOs is not a sustainable strategy.

“If a company is inherently good, every fund manager will anyway feature it in her portfolio,” says Suresh Sadagopan, founder of Ladder 7 Financial Advisories.

All equity funds can apply for shares of IPOs anyway. However, Avasthi has a different take, “Being thematic, the scheme offers focused exposure to recently listed IPO universe, compared to a regular diversified fund.” The fund has not gone overboard with any one stock. “After detailed analysis, each stock in the portfolio is classified into two buckets and exposure is accordingly sized, up to 5 percent in structural growth businesses and up to 3 percent in cyclical growth firms, at the time of investment,” he adds.

What should you do?

Focusing only on IPOs is a risky strategy. Typically, bull markets are flooded with IPOs and not all companies are investment-worthy.

This scheme is meant only for savvy investors with high risk-taking ability. If you aren’t comfortable with investing in newly-listed companies, you are better off with a diversified flexi-cap equity fund. You won’t miss much of the IPO action.

Those feeling comfortable with the IPO strategy, can invest a small sum in such funds. And as Vishal Dhawan, founder and chief financial planner of Plan Ahead Wealth Advisors advises, “Do not trade in this fund. Invest for the long run, as the fund managers will invest in a bunch of recently-listed IPOs.”
Nikhil Walavalkar
first published: Jun 1, 2021 09:34 am

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