Selective Approach Adopted by Mutual Funds Regarding Initial Public Offerings

In the first seven months of 2025, mutual funds have shown a marked shift in their participation in Initial Public Offerings (IPOs). A study reveals that the proportion of IPOs where mutual funds took part has fallen from 96% in 2021 to 68% year to date up to July 31, 2025.

This change in behaviour can be attributed to mutual funds becoming increasingly selective in their IPO participation. Typically, funds require a free-float market capitalization of at least ₹2,000-3,000 crore to justify allocation. Stocks with higher market capitalization such as HDB Financial (₹69,758 crore), Hexaware (₹46,419 crore), and Anthem Biosciences (₹41,017 crore) have drawn strong mutual fund interest.

On the other hand, stocks with sizeable market-cap but moderate MF participation include NSDL (₹18,720 crore), Schloss Bangalore (₹14,546 crore), and Dr Agarwal's Health (₹12,684 crore). The participation of mutual funds in these IPOs was 22, 26, and 14 schemes, respectively.

Investment decisions in IPOs are not just about valuations; funds also check if an IPO fits their investment mandate, sector preference, and whether the issue is large enough for meaningful allocations. This selective approach is evident in the mutual funds' avoidance of offerings such as Shanti Gold (₹1,652 crore), Arisinfra Solutions (₹1,411 crore) and Stallion India (₹999 crore).

The IPO market moves in cycles, with valuations potentially reaching frothy levels similar to those of 2021 and 2024. However, the current favourable phase is expected to last another 3-6 months. Despite this, average listing gains for IPOs in YTD2025 are at just 12.9%, a sharp decline from healthy gains of 29% in 2024 and 43.3% in 2020.

Post lock-in returns also remain subdued, averaging 11.8% after 30 days and only 9.2% after 90 days. This trend is further highlighted by the fact that only 1 in 6 IPOs launched since 2023 turned into wealth multipliers for mutual funds, with prominent laggards including Popular Vehicles (-60%), Credo Brands (-56%), and ESAF SFB (-50%).

SEBI's 2024 study shows that MFs sold barely 3.3% within a week of listing and exited less than one-third even after a year, demonstrating their role as long-term investors. However, many recent IPOs have been small, with market capitalization below ₹1,000 crore, making it difficult for mutual funds to build meaningful positions.

Mutual funds invest in IPOs either through main book allocations or via secondary market purchases post-listing. MF assets have nearly tripled, from ₹27 lakh crore in July 2020 to ₹75 lakh crore in July 2025. This growth, coupled with the need for meaningful positions in IPOs, could explain the selective approach of mutual funds in 2025.

Deepak Jasani, a market veteran, suggests that selective IPO participation could signal a less than encouraging overall experience with IPOs in recent years. As the IPO market continues to evolve, it will be interesting to see how mutual funds navigate this landscape in the coming months.