Risky bets

Mutual fund investments have dominated the capital markets | Photo Credit: iStockphoto

There has been frenzied activity in the primary market for equities in the last three years — with promoters making the most of growing demand to raise capital at extremely high valuations, and investors buying these issuances to rake in quick gains. What is concerning here is that mutual funds have been participating aggressively in the primary market in recent years. A recernt analysis by this newspaper shows that mutual fund investments accounted for around one-third of the aggregate size of the mainboard IPOs in 2024 and 2025 and 26.6 per cent of the IPOs which opened between January and August 2026.

Investments in the primary market are riskier than in the secondary market due to the sheer lack of information on companies making primary offers. Information about an IPO-bound company is largely limited to its offer documents. In the case of a listed stock, there would be sufficient historical record of financial and operational performance as well as management conduct to help investors take an informed decision. With primary issues, the risk has been compounded by price manipulation in many stocks in the period immediately following the listing to enable subscribers to exit early with hefty gains. But given the pressure on mutual funds to deploy high inflows through systematic investment plans, they appear keen to invest in IPOs — often without due diligence. This could hurt investor interests.

Mutual funds invested in over 90 per cent of the IPOs between 2020 and 2022 and around 78 per cent of those over the last four years. The amount of investor funds invested in primary market has been increasing steadily; rising from ₹6,684 crore in 2020 to ₹57,668 crore in 2025. SEBI’s rules have been largely supportive of mutual fund money flowing into the primary market. The regulator allows them to invest through the qualified institutional buyer category or as anchor investors, one day prior to the opening of the IPO. Given the confirmed allocation in the anchor investor portion, mutual funds have been leaning on this route to buy IPO stocks.

But many fund managers appear to be viewing primary market investment as a short-term opportunity. According to a recent SEBI survey, MFs had exited 38 per cent of the anchor allotment by the end of one year from allotment. SEBI must review the rules governing mutual funds’ investment in primary offerings. Last year, the regulator had barred mutual funds from participating in pre-IPO placements since that could saddle them with illiquid securities, if the offer is delayed. Rules can be carved out for MF schemes which are eligible to invest in IPOs. Special primary market funds can be introduced as a category, where IPO stocks can be parked. That will also give investors the option of choosing to invest in IPO offerings. If regular equity or hybrid schemes invest in primary offerings, the value of these investments should be limited to less than 5 per cent of the portfolio value.

Published on September 11, 2026