While the adage “higher the risk, higher the returns” holds true for mutual fund investing, it’s often advised to evaluate risk tolerance to avoid mishaps.
But there might be a way out if investors take a calculated risk in their satellite portfolio—additional positions added to the portfolio in the form of actively managed investments—and not in the core basket.
Radhika Gupta, chief executive officer at Edelweiss Asset Management, shared a similar opinion as she talked about converting the fund house’s close-ended maiden opportunities fund to the open-ended “Recently Listed IPO Fund”, which would invest in recently listed 100 companies or upcoming initial public offers.
The fund was launched in February 2018 and is approaching maturity on June 28, 2021. It has returned 14.3% versus 11.2% by Nifty 500.
The IPO fund, according to Gupta, allows anchor investing options and focus on new-age businesses, helping investors get concentrated exposure to good issues. “[But] this isn’t a core portfolio. It’s my fund but I will never say it’s a core portfolio holding fund. It’s a satellite or thematic idea,” she said on BloombergQuint’s weekly special series The Mutual Fund Show.
Shalini Dhawan, director and co-founder of Plan Ahead Wealth Advisors, too, would recommend this fund as part of a satellite portfolio, but suggested investors weigh its risks as well.
One of the concerns, according to Dhawan, is that not all IPO stocks are worth investing. “It’s about how that IPO performs and there could be a case where a mid-cap stock becomes a small-cap stock, or a small cap becomes a micro, and as an investor, you do not have much say except for exiting that scheme, if you had to.”
Another risk, she said, is what would happen when IPOs dry up or in a bearish scenario when there aren’t too much choice in analysing which IPOs to go for.
Note Of Caution
Dhawan advised investors to not get lured by “too good to be true” return promises.
Citing the instance of SBI Special Situations Fund, which according to a text message circulating claims to promise 13-14% returns, Dhawan said while the fund has given decent returns so far, it’s suitable for sophisticated or ultra high-net worth individuals with high risk appetite, and isn’t a replacement of fixed deposits part of the portfolio.
Investors, she said, should understand this as a very risky investment as it seeks to invest in unlisted high yield debt.