Investing in IPOs to make listing gains is not a sin. However, it should not be the sole driver of one’s investment purpose.
Many investors believe that IPOs allow them to invest in an upcoming business before it becomes too expensive, and some investors have a short-term goal to make listing gains.
Anup Bansal, Chief Investment Officer, Scripbox, says, “Investing in IPOs to make listing gains is not a sin. However, it should not be the sole driver of one’s investment purpose.”
He adds, “Any stock one chooses to add to one’s portfolio should be in sync with one’s financial goals and risk appetite.”
Here are some of the Dos and Don’ts for investing in an IPO:
- Do your due diligence regarding the issue. Bansal explains “Unlisted businesses do not have historical records in the public domain for you to assess and the RHP document is the first such document that becomes available at the time of going for the IPO.”
Hence, experts say, one should gather as much information as one can about the business – from RHP, promoters, key business drivers, growth prospects, to the existing stake of private investors and venture capital, competitive landscape and valuations of similar companies with respect to size and sector, etc.
- Have a look at the subscription levels of institutional buyers. “A high QIB subscription is usually an indicator of strong quality and price. If the stock is not overly subscribed at the retail level, you need not buy multiple lots up to the full quota of Rs 2 lakh,” says Bansal.
- If you do miss on a subscription, don’t be in a hurry to get it immediately on the listing. Experts say let the initial euphoria settle to see investor interest and evaluate how the company settles in new waters. Keep in mind always the long-term prospects of the business.
- Over the last five years, close to 600 entities have gone public. Of these, almost 40 per cent of stocks are trading below their listing price even as of date. Keep in mind not all IPOs are expected to do well in the future so diversify. You can also invest in IPOs through mutual funds dedicated to IPO investing to reduce risk and create a basket of IPOs.
Having said that, don’t invest blindly in an IPO because the ones in demand will be oversubscribed and according to experts, your allocation will be much smaller than the Rs 2 lakh limiting your gains in absolute terms.
For instance, Bansal says, stocks like Paras Defense and Space Technologies, Sigachi Industries and Latent View Analytics more than doubled and tripled on listing day. These stocks were phenomenally oversubscribed, due to which the actual allotment was minuscule.
The Spuzz is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.