Should you take the IPO bait?

If you aren't sure, purchase the shares in the secondary market

Investing in an initial public offering (IPO) is a tough call. One, there is no historical data to go by, and many times, retail investors are completely unaware of the company. So, the typical strategy is to go by the hype that is built around the issue. But, that is a completely wrong strategy.

With Bharti Infratel, CARE and P C Jeweller, the IPO season is back. The government is also trying its bit to increase investor appetite through the Rajiv Gandhi Equity Savings Scheme (RGESS).

Brokers and brokerages are already going all out to woo retail investors to participate in the public issues, specially bigger ones like MCX and Bharti Infratel. According to Abhinav Angirish of InvestOnline.in many investors put money in public issue(s) because they feel they will make money for sure. Sure, there are those who have stuck to big names like Infosys, TCS, State Bank of India and have made good gains. “When new fund offers of mutual fund were called IPOs, people used to invest thinking they will surely make money as some other NFO / IPO had done well. Unfortunately, that is not the case,” he warns.

Sample this: Between 2011 and 2012, there were 58 IPOs, excluding the ones floated this month. Of these, 37 have given positive returns, that is, a good 64 per cent. But most of these IPOs were very small ones. The results are mixed if one looks at bigger ones. L&T Finance Holding (72.50 per cent so far), Muthoot Finance (12.50 per cent), Future Ventures (-2.50 per cent), PTC India Financial Services (-36 per cent) and MCX (45 per cent).

Investing in IPOs requires careful thought, backed by answers to two basic questions, says Kapil Narang, chief operating officer of Ameriprise India. One, do you understand the business, does the company have good fundamentals, a healthy balance sheet, good growth prospects and does the IPO price justify the future earnings? Two, how does this investment relate to your financial goals and asset allocation? “If the answer to these queries is yes, consider IPOs, else don’t get wooed by the general euphoria. Just because IPO season is back does not necessarily mean that they will fetch you gains,” he says. Many even buy into IPOs because they come cheap. For instance, if TCS is quoting at Rs 1,250 and a peer company’s IPO is quoting at Rs 100, many may prefer the IPO over TCS. But, that can’t be a reason, says Angirish.

It is better to take help of an informed advisor who takes into consideration your needs and risk appetite before advising an avenue / IPO. Or, you go through the Red Herring Prospectus (RHP) thoroughly before putting money into an IPO. If you are unsure, wait for the stock to list and then take a call.

Like certified financial planner Arnav Pandya says, exposure to equities can be taken both via primary and secondary market instruments. Also, there are mutual funds that are the best options if you are an uninformed investor. Given all these options, there is no reason to get swayed by the IPO hype.