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What retail investors must do to make the most of the IPO frenzy

The sharp rally in the markets and a spate of IPOs have made investors rush for making quick money. But a prudent approach may be needed for sustained gains

March 16, 2021 / 09:42 AM IST

A total of 27 Initial Public Offers (IPO) have hit the market since the beginning of 2020. The number of demat accounts has gone up by 12.2 million in this period. It’s easy to apply for an IPO these days and everyone wants a pie. The question is: are you doing enough research to shortlist companies whose shares you wish to buy? Or, are you just keen to join the quick returns party?

Mumbai-based engineer, Sanjay Joshi (36, name changed), has a strategy to apply for IPOs. He wants to increase his chances for allocation as much as possible. So, he has four demat accounts; one in his name, and one each in his wife’s and parents’ names. So far, he has got nine allotments in the past two years. The problem is, he is at a loss on what to do with them now. “Initially I used to sell on the day of listing. But later, I decided to hold as prices continue to rise,” he says. But now, he says, it’s tough to keep a track. Sanjay and with his family members own shares of 43 companies and 14 equity mutual fund schemes.

A lot of blockbusters IPOs, Tata Consultancy Services, Maruti Suzuki, NTPC, IRCTC and Avenue Supermarts (D-Mart) have hit the market in the past two decades. Retail investors have been drawn to them.

Ramanathan, 29 (name changed) applies for IPOs in his in-laws’ names. His strategy: to sell them in the first half-hour of listing. Given the gains that IRCTC (256 percent compounded return) and Dmart (80 percent) delivered given since listing day, Ramanathan regrets selling them so early.

How can you make the most of your IPO investments?

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Avoid bad apples and keep the good ones

Ankit Pareek, Research Analyst, Choice Broking says, “You should consider the business model and outlook, valuation and corporate governance while analysing an IPO.” Pareek advises avoiding firms that simply raise money because sentiments are good all around.

Read up on companies. Check if large institutions such as pension funds have bought shares of your chosen company. Typically after listing of shares and after declaring quarterly earnings, the company starts engaging with analysts. More information about business is shared with investors. “It is extremely important to have knowledge of valuations to decide whether to exit at available price or hold it for a longer time, as markets discover the true value of company over a period of time,” says Sandeep Bhardwaj, CEO, Retail, IIFL Securities.

Shrikant Tare, 65, is a retired engineer

Shrikant Tare, 65, a retired engineer, started investing in stocks and mutual funds after he retired. “I have applied for IPOs of companies that have some track record in that business,” he says. His systematic approach has ensured he isn’t over-diversified like many others. Out of 13 stocks that he holds in his portfolio, eight are large-sized companies with good track record.

Should you invest just for listing gains?

Selling on listing day is not that bad, if you limit yourself to just a tiny allocation for this strategy.

Nirali Shah, Head of Research at Samco Securities, says, “If you apply for many IPOs without studying company fundamentals and go with the market sentiment, then you are better off selling them on listing day. Some of these companies are bound to be inferior businesses and will land you in losses over time.”

Devendra Verma, 41, is a Company Secretary

Devendra Varma (41), a company secretary, says, “I look for companies that have done well operationally as well as financially. But I am keen to apply for those IPOs for which the subscription figures are on the higher side.” Although Varma invests for listing gains, he has held on to companies such as Dmart and Route Mobile because he sees long-term potential. He holds IRCTC due to its monopolistic market share.

Should you borrow to invest in IPOs?

That’s a strict no. “Margin funding is a double-edged sword. It’s risky,” says Sandeep Bhardwaj, CEO, Retail, IIFL Securities. If the shares applied for IPO list at a good premium and you get reasonable allotment, you take home some gains after adjusting for the borrowing costs. But if the IPO lists at a discount or you do not get allotment of shares, then you have to bear the financing costs.

Moneycontrol’s take

When you invest for IPOs, make sure you understand the company and the business. Applying via the demat accounts of family members is a strategy many individual investors use. But too many small allotments can also bloat your portfolio after a time, and make tracking difficult.
Nikhil Walavalkar
first published: Mar 16, 2021 09:42 am
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