It is rare to find a person who doesn’t want to make big bucks in quick time. Those active in equity markets often construe Initial Public Offers (IPOs) as a way to make sure shot gains at listing. Even the experienced investors forget that equity as an asset class is essentially for the long term.

The record says IPOs have been a mixed bag for investors. Some stocks such as Page Industries and Yes Bank which were listed in the last decade have become multi-baggers by making as high as 2,000% gains over their offer price. Yes, you read it right. Although these stories might excite you to go more bullish on IPOs; you should also take out time to read about failures. Can you forget the IPO of Reliance Power? The IPO, which hit the market at a time when laymen spoke like stock market gurus. The IPO which investors hoped to have provided eye-popping returns ruined their expectations.

How the stocks listed in past ten years have performed?

(The Hindu Business Line, PersonalFN Research)

Business Line dated June 05, 2016 reported that, just 40% of IPOs that were launched between 2004 and 2011 traded above their offer price at the time of going to press. The trouble with investing in IPOs is that investors know little about companies and any investment done without doing adequate research is always risky. If stocks trade below their offer price, retail investors become reluctant to selling such shares as they hope to recover at least their initial capital some day. If prices fail to recover even after a long wait, their losses widen.

Out of every ten companies that went public in 2015 and in 2016 so far, almost four have been trading below their offer price now.

What may go wrong with an IPO?

• It possible that the shares of a company are being offered at a higher price vis-à-vis its potential.
• The business of a company may not have a great future.
• The management of a company may not be competent enough to run a listed company; given the state of corporate governance in India.
• Big investors may dump the stocks on listing because of which the stock price may fall relentlessly.

What approach should you adopt?
PersonalFN is of the view that, investors should avoid speculating on the listing price. You should not take listing gains for granted. A few have a habit of depending on the premium that prevails in the grey market. Let’s not forget nothing in the grey market is documented. Therefore, if your information goes wrong; you won’t recover even your capital until your hair grow grey. If you want to invest in a company during IPO, make sure you understand the businesses of the company you are investing in along with the risks involved in investing.

If you are not comfortable doing analysis or just lack time, leave this job to a professional mutual fund manager. You may invest in an equity oriented scheme with an impressive track record and which has flexibility for investing in IPOs.

PersonalFN believes, rather than focus on making quick gains; you should think about your long term goals before taking any investment decision. The speculative approach is always hazardous. Instead, you should draw a personalised asset allocation plan based on your long-term financial goals.

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bal.orange@rediffmail.com Jul 07, 2018 You are 100% correct.

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