Questions raised on mutual fund investment in new age firm IPOs!

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Recently, there has been a lot of discussion about the IPO of Mamaearth. In the IPO of its parent company, Honasa Consumer, seven mutual funds invested around Rs 254 crore as anchor investors. However, its listing was lacklustre, and the share looked in poor share after the listing.

Hence, a lot people are raising questions about what mutual funds saw in this company before making an investment.

Before this, mutual funds had invested heavily in new-age startup companies like Paytm, PB Fintech, CarTrade, and others, and everyone knows what happened to them.

Mutual funds are being criticised for investing in the IPOs of new-age startups with a poor track record and weak financials.

Investing in a new company is always risky because they do not have a track record, and there is a greater chance of ups and downs in them.

Especially in new-age startups, there is a concern about significant volatility. Experts advise caution to retail investors regarding investing in them, so why aren’t mutual funds cautious?

Many of these companies have not yet turned a profit; they only have an estimate of when they might become profitable. If their business does not perform as estimated, then profitability may be delayed, and it could take a considerable amount of time.

Fund houses can invest in an IPO as anchor investors or institutional investors. However, there is a lock-in period for anchor investors. They can sell 50% of their shares after 30 days of listing and the remaining 50% after 90 days. It has been observed that mutual funds sometimes sell shares after the lock-in period. However, in cases where the fund house has confidence in a company, they may average down by buying more shares if the share price drops.

In this context, the question arises: Despite observing the performance of previously listed startup companies, why are mutual funds still investing in the IPOs of new-age startups? Why are mutual funds, built on the hard-earned income of ordinary investors, taking such risks?

So, in this matter, there are 2 sides of the coin. In some cases, fund managers are investing at the cost of investors to maintain their relationships, while in others, investments are being made with the hope of good returns.

Some experts say that mutual funds do not just look for short-term gains. Through IPOs, they seek companies that could potentially be multibaggers. Before investing in such companies, mutual funds conduct due diligence.

Market expert Ravi Singh says that it has been observed many times that a fund manager of a mutual fund has invested in an IPO based on personal relationships. The consequences of any kind of favoritism by the fund manager have to be borne by the common investor. However, sometimes funds also invest in IPOs in the hope of better growth, and they have made good profits in some companies.

If the right choices are made, investments are timed correctly, and the right amount is invested, then money can be made through IPO investments. The business model of the company should be trustworthy.

In conclusion, looking at the way mutual funds have invested in several startups in recent years and faced losses, questions are being raised about the decisions of fund managers.