It's easy to give in to your best judgment and join the IPO party that has been throwing up one winner after another. The super successes of recent IPOs make investing look easy, almost a no-brainer. Look up the grey market premium of an ongoing issue and invest. The only problem with this type of investing is that such parties do not last, and you can lose your savings when the music stops.
You need to remember, flipping stocks, applying in an IPO and selling it for listing gains is not what will fund your long-term financial goals. It will not provide for your kids' education, marriage, or build a retirement nest egg for you. Yet lakhs of investors play this game with every issue. And many of them do lose their hard-earned money this way. We look at five ways you can protect your savings in an IPO-crazed world.
1. Do not succumb to the fear of missing out: You will hear many stories of a friend's distant relative making a killing in some IPO or the other. Or a friend may claim to have made big bucks investing this way. Do keep in mind that first, there is no easy money. Second, in these IPO-crazed times, the chance of a retail investor getting a large allotment is slim to nil. Significant gains, therefore, are not likely. Finally, making money off IPOs is not sustainable in the long run. For every Nykaa, there are innumerable many that have lost investors' money.
2. Do not turn to TV anchors, brokers or your trading apps for investment advice: In the case of a TV anchor, they may just be selling you this issue. Brokers and trading apps make money only when you trade in securities, whether you make a profit or loss. So when your trading app reminds you about the latest ongoing IPO, ignore it or, better still, switch marketing notifications off.
3. Remind yourself that IPO valuations do not favour retail investors: IPOs in a raging bull market generally never favour retail investors. When promoters, private equity investors and big investment bankers come together to make a company public, a fair or reasonable valuation for the retail investor is of little consideration. All of these parties work to maximise either their returns or trade at the highest possible price. This leaves little on the table for investors like us. Also, keep in mind, not all IPOs make high listing gains. Most do not.
4. Stick to your SIPs: A good way not to get sucked into the IPO euphoria is to stick to your systematic investment plans or SIPs. Whether mutual funds or stocks, investing regularly will leave you little surplus to "play" and risk your money in the IPO game.
5. Are IPOs really the best time to buy that company? There are times when companies with a good track record, clean financials and strong outlook come for listing. The problem is they are priced to favour promoters, early investors and investment bankers. Most often than not, the same issue is likely to be more reasonably available in the market after the initial euphoria has ended. A study by my colleague Vikas Vardhan concludes that the best time to buy into a hyped-up IPO that lists at over 50 per cent premium is one year later. You can read more of Vikas' analysis here.
So here's a quick recap. Do not feel guilty if you don't invest in IPOs. There are better ways to make more money in the long-term. Stick to your systematic investment plans and if you really want to invest in a recently listed IPO, better wait for a year so that much of the euphoria with the stock is over. Do this, and you'll end up with an even better offer.