If you are the kind of investor who keeps an eye on the long-term prospects of new-age companies coming up with initial public offers (IPO), the Edelweiss Recently Listed IPO Fund would have caught your attention. It is an open-ended equity scheme that aims to invest in recently listed 100 companies and upcoming IPOs. The scheme is open for subscription from July 29, 2021.
In its previous avatar, Edelweiss Recently Listed IPO Fund was known as Edelweiss Maiden Opportunities Fund – Series 1 (EMOF). That was a close-ended fund with an AUM of about ₹520 crore and focussed on recently listed IPOs. The close-ended scheme matured on June 28, 2021.
Being a thematic fund, Edelweiss Recently Listed IPO Fund invests at least 80 per cent of its total assets in the theme’s universe stocks comprising 100 recently listed and upcoming IPOs. The scheme picks 30-40 stock ideas using a bottom-up approach.
Since most of the companies that raise funds through IPO are new-age companies aiming to grow their business, the scheme will have a bias towards small-caps and mid-caps. Also, it is understood that the scheme focusses more on the growth aspects of the business than valuations.
In a bull market situation, like the one we are witnessing now, IPOs usually come at higher valuations. A particular sector or industry may become the flavour of the season and might attract more companies in the sector to come up with IPOs. To reduce the risk of sector concentration, the fund has internal limits for sectors (maximum of 35 per cent for a sector) and stocks (about 3 per cent for cyclical stocks and 5 per cent for non-cyclical stocks).
The scheme will be rebalanced, when required, to meet the criteria of the investment universe of recently listed 100 IPOs. Thus, a stock that meets the investment universe criteria now may not be part of the portfolio as more companies tap the public issue market. However, if a particular stock continues to hold potential to deliver returns, the stock will be held as part of the 20 per cent of the portfolio for which there is no specific investment mandate as per fund house.
The fund might also evaluate the option to stop subscriptions once the AUM reaches a certain limit.
The fund is benchmarked to India Recent 100 IPO Index (TRI).
Portfolio and performance
Since the new scheme is an extension of the erstwhile close-ended EMOF, the portfolio remains broadly unchanged.
As on June 30, 2021, the scheme allocated 36, 34, 30 per cent of its assets to large-caps, mid-caps and small-cap stocks respectively. This was distributed across sectors including banks and finance, healthcare, insurance, IT and capital goods. The top holdings of the scheme include Dixon Technologies, Avenue Supermarts, Clearing Corporation of India and Metropolis Healthcare. The top holdings constitute just more than 20 per cent of the portfolio.
In the last three years since inception in 2018, the fund has churned one-third of its portfolio. .
The scheme has outperformed its benchmark with one-year return of 75 per cent and three-year return of 21 per cent as on June 30, 2021. During this period, the 1-year and 3-year return for the benchmark was 59.3 per cent and 12.4 per cent, respectively. The fund also outperformed the Nifty 500 TRI, which delivered 60.7 per cent and 15 per cent returns for the above periods respectively.
The fund has managed the downsides well in the market crash witnessed in March 2020. From February 19 to the March 2020 low, the scheme lost 29 per cent, less than the Nifty 500 index’s 37 per cent decline. In the rally that followed the March fall, the scheme gained 104 per cent against the index’s 99.4 per cent till recently.
Theme-based categories of mutual funds carry higher risk than broader market investments since the success of the theme determines the success of the fund. In this IPO themed fund, if the quality of new IPOs deteriorates the investible universe of the fund may shrink. Also, in case of a prolonged bear market, the scheme may find dearth of investment opportunities as companies may defer public issue. This may subsequently impact the performance of the fund.
Since the scheme is mid-cap and small-cap oriented, those with a high risk appetite can invest a small sum in such funds as part of their satellite portfolio.
Note that EMOF was a close-ended fund and one should not rely on its performance to assess the returns of the Edelweiss Recently Listed IPO scheme, which is open-ended. Close-ended funds, despite being riskier than open-ended, may offer better returns due to the stable asset base that will not be impacted by inflows and outflows.