In recent years, the excitement around IPOs (Initial Public Offerings) has moved from niche investor chatter into mainstream headlines. You’ve probably seen the coverage: “record subscription”, “blockbuster listing”, “huge first-day gains”. And if you’re a mutual fund investor through a SIP or a regular scheme, it’s natural to ask: is my money being used carefully, or is it part of the IPO hype machine?
When a fund invests in a newly listed company, it can capture early growth. That sounds good. But when that company is priced very high, has a short track record, or belongs to a trendy sector, the risk becomes real—and unfortunately, that risk gets passed on to you.
This article unpacks what happens when mutual funds buy into expensive IPOs, what that means for your portfolio, how to spot the warning signs, and what you can do as a smart investor to protect your money. By the end, you’ll have a clearer sense of what’s going on behind the scenes—and how to align your investment choices with your risk comfort. Let’s roll up our sleeves and dig in.
Why Are Mutual Funds Investing More in IPOs?
It’s not just retail investors wanting a piece of the action. Fund houses are increasingly participating in fresh listings—and for a few good reasons.
- Inflows are surging. Many equity funds are seeing strong inflows. With more money to deploy, fund managers are looking for new opportunities beyond the usual large-cap stocks.
- Growth story is loud. Many IPOs are pitched as “the future”—disruptors, high growth, new sectors. Fund houses don’t want to miss that if it plays out well.
- Valuation stretch is happening. Data from Q2 FY26 shows mutual funds invested around ₹ 8,752 crore into newly listed stocks, with a significant bias toward small-cap IPOs. Business Standard+1
- Regulatory shifts pushing change. For example, Securities and Exchange Board of India (SEBI) recently barred mutual funds from pre-IPO placements, limiting them to anchor or public issue portions of IPOs. Reuters+1
So yes, the trend is real. And liquidity, ambition and regulatory changes are combining to push funds into IPOs more than before.
The Problem: When IPO Exposure Becomes Risky
When a mutual fund holds high-valuation IPOs, a few common issues can arise. Let’s walk them through.
Limited business history + high expectation
A newly listed company may have limited track record — perhaps strong promise, but weaker proof of execution. When the IPO valuation already assumes stellar performance, any hiccup can be painful. Ordinary investors expect steady growth, but sudden slowdowns hit hard.
Higher volatility = your NAV swings more
IPOs are more volatile. Some jump on day one, others falter. If your fund is significantly exposed to these, your Net Asset Value (NAV) might show larger ups and downs. Worse, if many of these holdings are in one sector (say small-cap tech), sector-risk amplifies.
Style-drift: you might be in for more risk than you bargained
If you signed up for a “large-cap value” fund and it now has many small-cap or newly listed names, that’s style-drift—the fund’s risk profile has changed. Recent research shows such shifts are more common than you might expect. arXiv
Liquidity & exit risk
Newly listed companies may have lower trading volumes, or if sentiment turns they may drop quickly. A fund with substantial positions may find exiting tough or costly—which again can hurt you.
Regulatory & valuation stress
When regulators like SEBI push back on IPO valuations (as they have), it adds another layer of risk. For instance, SEBI discouraged pre-IPO placements for mutual funds because of risk of holding unlisted shares. Finshots+1
How to Tell If Your Fund’s IPO Exposure Is Reasonable
Here’s a practical checklist you can apply in 10-15 minutes.
1. Review the fund’s portfolio
- Open the latest factsheet and see “Top 10 holdings” and “Recent additions”.
- Count how many IPOs appear and what percentage of the total portfolio they form. If more than ~5-10 %, dig deeper.
- Check how many stocks fall under “newly listed” category.
2. Ask questions about the IPO stocks
- Do these companies have at least 2-3 years of listed performance (or real earnings)?
- Are their valuations in line with peers? If they trade at double the price/earnings ratio of comparable firms, that’s a red flag.
- Are the business models clear? If it’s a “future theme” story without proof yet, you’re taking story-risk.
3. Check if the fund’s stated strategy aligns with what you see
- Did the fund say it’s “large-cap focused”? Yet show heavy small-cap and new-listing exposure? That’s a mismatch.
- Read manager comments. Are they emphasising IPOs and listing gains, or focusing on long-term fundamentals?
4. Monitor how your goals align
- If you’re invested for a 5-10 year horizon, the ripple from IPO risk might be okay.
- But if you’re shorter-term (say 3 years) and still want moderate risk, large IPO exposure may not be suitable.
What You Can Do As an Investor
Let’s move into practical territory—what steps you should take.
- Diversify your mutual fund holdings. Don’t put all your money into one fund type. Pair, for example, a fund with moderate risk (large/mid-cap) with one that may invest in newer listings.
- Stick to SIPs (Systematic Investment Plans). If you’re investing regularly, SIPs help smooth out timing risks (e.g., buying into an IPO-heavy period).
- Don’t chase the “hot fund”. If a fund’s recent outperformance is driven by listing gains, ask: Is this sustainable? Fund houses recently cautioned that many tax‐saver funds underperform their benchmarks; hype does not equal consistency. The Financial Express
- Check your risk comfort. If your fund has become more aggressive (higher IPO/new-listing exposure) than what you signed up for, consider switching or rebalancing.
- Ask your advisor or read disclosures. Simple: what percentage of the portfolio is currently in IPOs? And how many of those are loss-making or unproven companies? For example, many funds today hold recently listed firms that were yet to turn profits. NDTV Profit
When IPO Exposure Can Make Sense
It’s not that all IPO exposure is bad—far from it. With the right guard-rails, it might add value.
- When the IPO companies are well-run, have consistent revenues, and are priced fairly relative to peers.
- When the fund allocates modestly to new listings—say under 5-10% of portfolio—and treats them as one of many holdings, not as the main bet.
- When the fund clearly states in its documentation that it invests in “emerging companies”, “newly listed businesses” and you accept the higher risk.
- When you have a long-term horizon (7–10 years) and can tolerate some ups and downs.
In such cases, the fund’s IPO bets could be a satellite strategy within your broader portfolio—fine as long as the core remains stable.
Conclusion
So, are mutual funds risking investor money in expensive IPOs? The short answer: yes, they can be—but not always. It depends heavily on how much exposure your fund has, the quality and pricing of the IPOs, and whether the fund’s strategy still lines up with your goals.
The good news: you can do something about it. By checking the factsheet, asking the right questions, aligning fund risk with your comfort level and not chasing the hype, you keep the advantage. At the end of the day, you don’t need to avoid IPOs altogether—you just need to understand what you’re investing in.
