Mutual funds in India are facing increased scrutiny from investors and market watchers over their aggressive participation in recent IPOs. The calls follow a string of high-profile issues where post-listing performance has fallen short of expectations, triggering questions about whether fund houses applied sufficient diligence when backing these offerings.
Several factors are at the heart of the concern. First, IPO-bound companies often carry elevated valuation premia and execution risks; despite strong narratives, many lack a proven profitability track record or transparent business model. Fund houses backing them thus expose unitholders to latent risk that may not be fully reflected in scheme disclosures.
Second, mutual funds are being called upon to justify their eligibility in the IPO supply chain, especially after the regulator Securities and Exchange Board of India (SEBI) clarified that schemes cannot hold unlisted shares acquired via pre-IPO placements. This directive limits funds’ access to early-stage issues, which could pressure holding returns and expose them to contingent liquidity risk.
Third, as mutual funds deploy large amounts of retail savings into IPO-linked investments, questions arise around whether these positive narratives align with fund mandates, risk profiles and investor disclosures. In essence: are fund units being used to chase listing gains rather than build long-term value?
For investors, the take-away is to check: how much of a fund’s portfolio is committed to recent IPOs; whether those exposures are consistent with the scheme’s stated risk/return profile; and how the fund house communicates the underlying risks of such bets. Going forward, greater transparency and alignment of incentives will be key to restoring investor trust.
