Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from investing in IPOs until the stock has traded for more than six months. There tends to be a lack of liquidity in many newly issued stocks that distorts pricing. Additionally, the first six months are dominated by insiders using market liquidity to unload their shares and gains in the stock driven by hype rather than fundamentals.
Many IPOs are companies with unproven business models and lack of a track record. Many mutual funds tend to be conservative and only invest in companies with track records of sales and earnings, thus indirectly disqualifying them from investing in IPOs. However, in recent years in response to investor demand, mutual funds have been created to invest in IPOs. Many of these actually make investments in private markets, giving retail investors early access to hot IPOs. Of course, investing in these products comes with increased risk.
Mutual Funds That Invest in IPOs
Many mutual funds with aggressive growth profiles already invest in IPOs. IPO investing has increased with these funds, especially with high-profile names going public, such as Facebook, Twitter or Alibaba. Additionally, a number of multibillion-dollar IPOs are in the pipeline, such as Palantir, Uber or Airbnb.
As of August 2015, the only mutual fund that exclusively invests in IPOs is the Renaissance Global IPO Fund. It invests in promising IPOs across the world. It is considerably riskier, given the elevated valuation and uncertain prospects of these businesses. Beyond mutual funds, investors interested in IPOs can track the First Trust IPO 100 Index and the Renaissance IPO ETF. Both of these passively track major indexes composed of IPOs. In contrast, the Renaissance Global IPO Fund is an actively managed product with higher costs.