You still need to check the price-value proposition before taking the plunge.
Retail investors in initial public offerings (IPOs) can look forward to participating more aggressively in stock markets. With the Securities and Exchange Board of India (Sebi) issuing a discussion paper to raise the existing limit from Rs 1 lakh to Rs 2 lakh, they need not invest in the names of family members if they want to ensure allotment or are really bullish about an issue.
Anmol Dutt, for instance, has been raring to invest in the recent IPOs. But the Rs 1 lakh-cap limited his enthusiasm. “My parents weren’t convinced about the IPOs, so I could put in only one application in the last three IPOs. The allotment, as a result, was very few shares,” says the 29-year-old.
In addition, the market regulator’s guidelines on applications supported by blocked amounts (Asba) will only help matters. Companies, which are raising funds can deduct only the amount as in the allotment.
Not for listing gains
Over the years, investors have used IPOs to make a quick buck. That is, by making listing gains on the same day. But that strategy only works in great market conditions. “The IPO market is driven by a spillover phenomenon. If the last couple of IPO’s do well, you can expect the next two IPOs to do well, too,” says Jagannathan Thunuguntla, head (equity), SMC Capital.
When things slow down, things can get real bad, as the IPO of Reliance Power proved in January 2008.
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Most market experts believe there is money to be made from IPOs as long as the investor is aware of the risks. “There is a real risk the investor is taking. It can go both ways,” says Suresh Sadagopan. His solution: Look for peers in the secondary market. Or, wait for six months before investing. If the scrip is still doing well, go for it.
Sebi’s move can be construed as a way to promote investor participation, especially when the government is about to unleash a spate of IPOs and follow-on offerings (FPOs) – Coal India, Steel Authority of India, Power Grid Corporation, Hindustan Copper being the major ones.
Price-value proposition
Experts say don’t buy the company just because it is big or a public sector unit. Many public sector IPOs attracted few retail investors earlier because of pricing.
“An investor needs to take a call whether he wants to buy it at the price offered. Some of the FPOs today are trading at 15 per cent below their issue price, while some others are 20 per cent up. The decision has to be made on a case-to-case basis,” says a CEO of a fund house.
Before investing your money, invest some time in analysing the stock. Compare the offer price with its peers in the secondary market. If a peer is trading at a similar price, even higher in the secondary market, it may be a good idea to purchase that. Plus, you can buy the number of shares you want to (depending on the liquidity of the stock), and not be dependent on the subscription numbers of the IPO.
Part of asset allocation
For an investor who wants to enter the market through the IPO route, experts feel it requires proper asset allocation. A 25-year-old with a 75-25 equity to debt ratio can include IPOs as a part of his equity portfolio. Otherwise, if your portfolio is in place, use it as a diversifier.
Importantly, don’t borrow to invest. It will be treated as a personal loan. The rates of interest can vary between 15-25 per cent. Though the Asba guidelines ensure your money is no longer with the company for three-four weeks and there might even be a small interest income – annually 3.5 per cent on savings account – it is too little.
But for best results, you will need to invest the entire amount of Rs 2 lakh. Allotments of shares are done in two ways – proportional and amount. The former depends on the subscription and the latter on the basis of amount invested. If the latter case is applicable, smaller investments may get crowded out.