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The Clash of IPOs and Mutual Fund SIPs: What It Means for Investors

The Clash of IPOs and Mutual Fund SIPs: What It Means for Investors
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Initial Public Offerings (IPOs) and Systematic Investment Plans (SIPs) in mutual funds have become two significant investment avenues in India. While both offer investment opportunities, they can sometimes collide in ways that impact market liquidity, stock prices, and investor returns. Understanding the dynamic between these two is essential for investors looking to invest in the stock market.

Market capitalization has grown by 55%, compared to a 22% rise globally, indicating the domestic market’s substantial strength. One key reason for the stock market’s strong performance is the nation’s collective belief in its domestic economic growth. Even as international investors had mixed opinions, domestic fund flows into equities have surged, fueling a market rally.

Over the last few years, domestic institutional investors (DIIs) have invested $107 billion, far outpacing foreign institutional investors (FIIs), who invested just $19 billion. This robust DII inflow has significantly contributed to the market’s remarkable gains.

Source: Economic Times

Market Performance Comparison

The impact of these inflows is evident in the performance of key indices:

Nifty 50: Up by 31% over the past 12 months.

AD 4nXc6ELvA975AZiUL8RAdXjPE Tt5O3HsDJuapyi xK7Y bK98ykD1ot5 eJDgwhE8QFcDnPh c4xQelWxPsLctT7vfOXZdnU36A3wyM4xa1sCS9WsbEjiaQEdRK 77fnJCe2 HChyqpLiFWppm5lJFz9JXE?key=vPcSC ff3M3 H4c1DF5YOw
Source: NSE

Nifty Midcap 100: Increased by 48%.

AD 4nXfhyGRo0h7bgTfiK084K5c31y6jB lIOyyZMafLV PA eQ85qpj2L1bE4gT48zozE2ShF2MYd87At3tnHNO57IMdC2upx3irT6 InGPh3UtTea2s3lDJbndhEQVDHeTkOqcr W3rCoX8IqtIFyeWR1Ae1sg?key=vPcSC ff3M3 H4c1DF5YOw
Source: NSE

Nifty Smallcap 100: Surged by 50%.

AD 4nXdHkNL3wOAvXtiFOzQgX6LvztATRWak8QBxo7zzd IctkvIaP1e3PyyZ7aJzwxDy8zWE9jPF2aU74dvsKfL0B8imhWcKhiMVPhg4YKuq JeMH jN7LIb3CvK2RbbzFhNdRgNo4MmkAndc54w5 TvshxOGhf?key=vPcSC ff3M3 H4c1DF5YOw
Source: NSE

In the past 12 months, the Nifty index has surged 31%, with mid-cap and smallcap indices outperforming by 48% and 50%, respectively. While robust corporate earnings and GDP growth initially supported this rally, the increasing supply of shares could alter this dynamic.

Inflation and Market Rally

India’s strong GDP growth of over 8% and robust corporate earnings were key drivers of the market rally. However, the rapid rise in stock prices was also fueled by demand-pull inflation, where increased money supply pushed stock prices higher.

As the stock market rose, more companies began capitalizing on the positive sentiment. This surge in supply, as companies rushed to sell shares and raise funds, signals a shift in market dynamics.

The Surge in IPOs

Several sectors, including tech and manufacturing, have seen companies file for IPOs to raise funds for expansion. According to recent data, by September 2024, around 120 companies had filed for IPOs, up from 112 in 2023 and 89 in 2022.  Source: Economic Times

The Collision Between IPOs and Mutual Fund SIPs

When many IPOs hit the market, the supply of new stocks surges. This can create a liquidity strain in the market, as funds are diverted towards purchasing IPO shares. As a result, mutual fund inflows via SIPs may face challenges absorbing this increased supply, potentially leading to short-term volatility in stock prices.

In the last fiscal year, mutual fund SIPs contributed INR 1.99 lakh crore to the market, with monthly inflows averaging INR 18,900 crore in 2024.

The number of companies filing for IPOs has soared. By September, 120 companies had filed for share sales, compared to 112 in 2023 and 89 in 2022. INR 64,485 crore was raised through IPOs in 2024, up from INR 49,436 crore last year.

In the first nine months of 2024, companies and private equity firms raised INR 1.65 lakh crore—the highest in three years. The market is set for more, with another INR 60,000 crore worth of IPOs in the pipeline, including major players like Hyundai Motor, Swiggy, and NTPC Green.

As these IPOs hit the market, the secondary market faces a unique challenge: how will the supply of new stocks affect prices and overall liquidity? Source: Economic Times

Impact on the Secondary Market

The secondary market, where existing shares are traded, could experience a decline in liquidity when investors rush to subscribe to IPOs. With limited funds available, institutional and retail investors may need to divert their resources from the secondary market to participate in IPOs, resulting in slower growth or a temporary dip in existing stock prices.

Mutual Fund SIPs: Will They Keep Up?

One critical question is whether mutual fund inflows through SIPs can sustain the increasing stock supply from IPOs. Despite steady SIP contributions, which saw a modest 3% rise in August 2024, the sheer volume of upcoming IPOs—an estimated INR 60,000 crore in the coming months—raises concerns about the market’s capacity to absorb this supply. Source: Economic Times

Potential Risks

Several factors could threaten the ongoing market rally:

  • High Valuations: Indian stocks are trading at historically high valuations by most metrics.
  • Slowing Earnings Growth: Nifty’s 24% annual earnings growth may no longer be sustainable, especially with external market challenges.
  • Global Diversions: International funds may focus on other regions, such as China, where stimulus efforts could attract foreign capital.

How Retail Investors Can Navigate This Collision

Retail investors must be cautious as the influx of IPOs may create short-term market disruptions. Here are some strategies to manage the impact:

  1. Diversification: Maintaining a diversified portfolio across sectors and asset classes can help mitigate the risks of market volatility.
  2. Long-Term Perspective: Investors should focus on long-term wealth creation through SIPs rather than chasing short-term IPO gains.
  3. Evaluating IPOs: While IPOs can be lucrative, it’s essential to carefully consider each company’s financials, growth potential, and market position before investing.

Conclusion

While both IPOs and mutual fund SIPs offer opportunities, their collision can create challenges in the market, especially regarding liquidity and stock valuations. By staying informed and maintaining a diversified investment strategy, investors can navigate the market complexities while benefiting from both avenues.

FAQ

  1. What is the upcoming IPO wave, and why is it significant?

    The upcoming IPO wave refers to various companies’ initial public offerings (IPOs), which are expected to raise approximately INR 60,000 crore. This is substantial and signifies a strong interest from companies to tap into the capital markets for growth. It also indicates a positive sentiment among investors and underwriters.

  2. How can mutual fund inflows support the IPO wave?

    Mutual funds can be crucial in supporting the IPO wave by investing in these new issues. When mutual funds allocate a portion of their assets to IPOs, it significantly boosts demand for these shares, helping them get subscribed and priced at attractive valuations. This can encourage more companies to consider going public, further fueling the IPO market.

  3. Are there any concerns about mutual funds’ ability to keep pace with the IPO wave?

    While mutual funds have seen strong inflows recently, several factors may limit their ability to keep up with the upcoming IPO surge. Market volatility could impact investor sentiment, reducing interest in riskier investments like IPOs. Additionally, competition from other investment options, such as equities, bonds, and real estate, could divert investor focus if these alternatives offer better returns or lower perceived risk. Lastly, potential regulatory changes affecting IPOs or mutual fund investments could introduce uncertainty, disrupting market dynamics and investor behavior.

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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.

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