The contrast between IPO inflows and steadier investments is stark
30-Nov-2023 •Dhirendra Kumar
So far, during November 2023, IPO investors in India have committed Rs 5.41 lakh crore to the 10 IPOs launched during the month. Given that the bank locates the IPO application amount in ASBA, this is actual money that was put up, not just a paper number. Of course, most of it came back, but it was real money. You could say that money committed to IPOs early in the month, like Cello and Honasa, would have become available again for Tata Tech and others later. This is likely, but even if you count only the IPOs that came simultaneously on November 23 and 24 (IREDA, Tata Tech, Gandhar Oil, Fedbank Financial and Flair), the application amount adds up to Rs 3.6 lakh crore.
In contrast, the average monthly SIP inflow for the six months to October 2023 has been Rs 15,585 crore. So, the amount committed for these last five IPOs alone was worth almost two years (23 months and a bit) of SIP inflows.
That's truly impressive but in a negative way. SIP culture has indeed come a long way in India - the monthly inflows during 2016-17 used to be in the Rs 3,000 crore range. However, the vast gulf between SIP investments and IPO interest shows that the typical equity investor has a deeper interest in a quick punt and some speculation rather than a steady but predictable wealth-builder option. You would have seen those social media memes that refer to the IPO frenzy as 'Khelo India Khelo' - you may or may not find them funny, but they certainly capture the mood of the activity.
The reality is that while IPOs may offer the chance for quick gains - which is all that a vast majority of punters invest for - they also come with substantial risk. On the other hand, SIPs in quality mutual funds have a strong track record of generating steady, long-term returns with much less volatility. The data suggests that many Indian investors have yet to fully appreciate the power of disciplined investing over gambling on the next hot IPO.
As we all know, IPOs come in waves. When a few IPOs succeed, more promoters start trying their luck. The process always results in a rapidly declining quality and ends in investors putting a greater and greater proportion of their money into stocks that sink on listing. Retail investors should avoid IPOs altogether, even when the underlying business appears strong. The key rationale for any stock investment should be the company's financial track record and prospects - the fact that it is an IPO is irrelevant to this core analysis. However, the IPO process itself stacks the odds against the average investor.
Unlike buying listed stocks, IPOs involve a severe information asymmetry between the seller (the company and promoters) and buyers. For years in India, IPOs have been pitched to retail investors as somehow advantageous for them. But the reality is that IPOs sharply favour the sellers rather than public participants. Regulators may try to balance the playing field, but retail buyers still operate at an inherent disadvantage.
Why? Because IPO companies have no public track record to scrutinise. The promoter spends months polishing the firm's image ahead of the offering, spinning a rosy story. The hastily compiled recent financials receive far from the public scrutiny of years of filings by listed firms. The promoter sets the offer price to maximise their haul, which is not discovered through the ruthless daily market consensus on valuations.
IPOs represent something of an insider's game. Retail investors walk onto the playing field not knowing the rules or the other player - making losing bets almost inevitable. Your best odds come from sticking to listed stocks with established track records. The next hot IPO is rarely the right place for your money.
Also read: India's biggest IPOs: Where are they now?