An IPO investment rule book for Calendar 2023
Year 2022 may not have been as flattering for IPOs as year 2021 was. However, the hope is that year 2023 should be a lot better. The slowdown in the IPO market came after the slew of technology and digital issues gave negative returns in the previous year. To add to the problem, LIC and Delhivery; two of the largest IPOs this year also gave negative returns. In fact, LIC has never even managed to get close to the issue price and it was a Rs. 22,000 crore issue with the largest retail franchise. The hope is that year 2023 could turn out to be a lot better.
Is there a rule book for IPO investing?
There may not be a rule book, but there are some basic rules that investors can adopt in the forthcoming IPOs so that their pain and disillusionment can be reduced.
- For every fly by night investors, there are hundreds of fly by night investor. If you enter the IPO market to make quick money, then you cannot blame the promoter for selling you stocks at higher valuations. The IPO market is not a market for quick money but for gradual growth. Take a long term approach and don’t jut look for listing gains on the IPO.
- You don’t have to invest in each and every IPO. That kind of passive investment approach may not serve you well, especially if it does not fit into your financial plan. Ideally, any investor must only invest in a handful of IPO after doing due diligence and researching the background and the prospects of the company.
- It would be naïve to purely go by the recommendations on various websites. Remember, such websites may have an axe to grind or they may just be aggregating ideas. Even if you read reports for information, make it a point to only undertake an investment in the IPO after doing your due diligence on the stock and being satisfied with the quality.
- Don’t chase IPOs, just because it is getting oversubscribed. According to empirical data, just because the IPO is oversubscribed does not mean the issue will give good returns. It is normal practice to jump into any IPO if the first two days see good subscription. That is not the right approach. Demand could be due to very hard selling by the promoters and merchant bankers and may not be backed by real fundamentals.
- When you are paying a premium, ensure that the premium is justified. You can go through the prospectus, ask probing questions to the broker and satisfy yourself. Now SEBI is insisting that all digital new age companies must disclose reasons and justify the IPO premiums. That is a good place to start.
- This is an extension of the long term holding argument. Don’t park funds in an IPO like you park funds in an FD or in a liquid funds. It does not work that way. Only invest funds in an IPO that you would not require for the next 2 years. Also, be wary of taking loans and investing in IPOs. Your equity returns are not assured but your loan outflows are commitments. You need to be doubly cautious.
- All good things don’t repeat. Just because previous few IPO have given bumper returns it does not mean that the next few IPOs will also give similar good returns. There is often a feeling of missing out on opportunities which makes people jump into IPO. That must be avoided too.
- Don’t just jump into an IPO because the brand is known or popular. A good brand may not be a good IPO idea. Ultimately it is quality of the issue and the valuations that really matter. Just focus on that. Not all good brands and not all good companies are also good IPO prospects.
- On a more procedural level, don’t use multiple demat accounts to apply for an IPO thinking it will enhance your chances of getting allotment. Remember, that all the Demat accounts are linked to your PAN and if the PAN is the same then the application would get rejected as being a duplicate application.
These are some basic rules to remember when you apply for IPOs in 2023.
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DisclaimerInvestment/Trading in securities Market is subject to market risk, past performance is not a guarantee of future performance. The risk of loss in trading and investment in Securities markets including Equites and Derivatives can be substantial.
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