Why Indian Mutual Funds Keep Investing in Loss-Making IPOs: Advisor Explains 'Appetite' Factor
According to Rajat Sharma, founder of Sana Securities, mutual fund houses are exploring new investment opportunities due to a surge in mutual fund schemes and excess capital.
The demand for initial public offerings (IPO) has not slowed down despite valuation concerns and muted listings for some mainboard issues in recent weeks. Institutional investors, especially Indian mutual funds, continue to show interest in loss-making IPOs, not to appease bankers or secure future allocations, but because of the strong appetite for deploying capital, an investment advisor explained.
According to Rajat Sharma, founder of Sana Securities, the surge in mutual fund schemes has created a need for new investment opportunities.
“Five years ago, India had barely 3,000 listed companies, yet the flow of money into equities was exploding…Fund managers were tired of parking money in the same handful of legacy names,” Sharma explained in an X post on Sunday.
According to him, legacy stocks like HDFC, Infosys, TCS and Reliance no longer offer enough growth opportunities. These companies have built India’s past, but are not a true reflection of its future.
"The market was rich in cash, but poor in innovation. So, the search began. Fund houses launched global mutual funds. Brokers opened the US investing tap and started allowing investing in innovative US stocks. Investors wanted stories of disruption, not dividends," his post further read.
Sharma further explained that soon after, "new-age India arrived on Dalal Street" with companies like Zomato, Nykaa and Ola, among others.
"Yet, tomorrow morning, Lenskart will list successfully, and given its financials, this too may trade at a discount soon enough. So, why do mutual funds keep signing cheques for loss-making IPOs? Simple — Appetite,” Sharma said.
He explained this reaction toward loss-making IPOs as a consequence of too much liquidity and a dearth of fresh assets in the market.
"Only about 275 companies in India have a market cap above Rs 30,000 crore. We’re basically investing the value of one such company every month through SIPs alone. Now add: Direct stock investors, lump sum mutual fund flows, FIIs….Too much liquidity, too few quality assets," he added.
According to Sharma, the coming decade for Dalal Street will not be just about investors, but also entrepreneurs and promoters.
"New IPOs, new listings, new ideas to absorb this flood of domestic capital. Because the one thing India doesn’t have right now... is enough paper for all this liquidity. There’s no right or wrong here. This is how markets evolve. This is what old-timers call the madness of bull markets," Sharma noted, adding he sees this situation differently.
“It’s the optimism of a young country where millions genuinely believe in entrepreneurship. So much so that Indian retail will shower all their love and money on you if you can get to the point of listing,” he said.
According to Sharma, India is currently riding an IPO wave, where “past losses won’t matter”, as long as the story inspires confidence.
“And mutual funds? They’ll keep writing cheques. Because when you have more money than avenues, you don’t have a choice,” his post concluded.
