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Concepts & Tutorials

IPO investing for retail investors

Bullish Indian offers 8 tips to retail IPO investors. The article says IPO investing is a low risk way of making money.

The truth is, investing in IPO is an easy, low-risk way to make an average of 2-3% in 20 days. A 2 -3% return can seem very low on a nominal basis, but when you calculate the annualised return it becomes very attractive. You can make an annualised return of about 30%, on an average, easily by investing in quality IPO’s by following the guidelines mentioned below.

His approach is quite interesting, since he prefers looking at institutional investments and bases his IPO investment on how much they are oversubscribed. If institutions bid for over 5 times their quota, he says buy. And if the whole IPO is more than 50 times oversubscribed, he says ditch the IPO, for getting allotment will be difficult.

If his theory was universally adopted, it would be a problem because institutions need not pay a single paisa before putting their bids. Retail investors have to pay all money up front. (An exception to this was the RPL IPO where institutions paid up 10% of all bids) Meaning, if an institution wanted to manipulate the stock price it could easily overbid and withdraw in the last minute. (And by the way, nearly all stock manipulation is institutional)

Also he mentions a potentially unethical concept – of paying by cheque and then doing a stop payment on the cheque if the IPO subscription statistics released later in the day don’t meet his conditions. Even if you argue it is ethical, if this kind of thing becomes common, IPOs will mandatorily require Demand Drafts or direct transfers. It costs money to process a stopped-payment cheque, and eventually it will only hurt us investors if they bring in such rules.

Now I don’t know how good his strategy will be, but Kaushik at Galatime conducted a study in 2005, and found that the upside was 83% vs. a downside of 12%. That’s quite a reasonable risk to take.

But it may not make financial sense if you want to do this consistently. I noted earlier that the cost of IPO investing can be quite high, and yields quite low. But if you choose the right kind of IPO (Opto Circuits is one example) your risk is extremely low and the yield excellent – can be 2-10% a month!

Remember also that IPOs flourish in a bull market. In declines, most companies don’t even go for IPOs. DLF’s IPO has been delayed over a year after all barriers were cleared – yet, every time it tries to announce an IPO something bad happens to the market and they go back underground. In such a situation, you may make 5% a month for three-six months and almost nothing in the rest of the year.

Finally of course remember that refunds can take inordinate amounts of time. Some readers have noted that they never got refunds from the Mindtree IPO even after two months, which completely messes up any positive effect of the IPO.

All in all, the strategy mentioned in the article is noteworthy and provides an excellent starting point for retail IPO investors. One question you may have is:

How to get oversubscription statistics? Visit the Current Issues at NSE and click on the IPO you want to invest. That will contain day-end statistics, and for real time stats, you can click the “NSE-BSE demand graph” link to see overall subscription.

  • Vikram says:

    >Deepak
    Please post ur views on the MIC Electronics IPO. Its a monopoly in LED video wall displays as seen in malls and stadiums.Seems to be an interesting sector.It also specializes in telecom services with BSNL as a client.At the upper band its trailing PE is 8.25 with a healthy growth rate.
    What do u think?Appreciate ur comments.
    Thanks in advance
    Vikram

  • Manish says:

    >IPO subscription figures indicate nothing but a big game these days.
    MIC Electronics was subscribed just 2 times till 7th May night, a day before last date.
    And all of a sudden everyone from FIIs to Retail segment everyone starts pouring applications at the last moment and whoo its subscribed 50times in total & 30times in retail!

    Now, subscription figures can no longer be used to track the demand of the IPO and as a decision making tool for applying or not!

  • Deepak Shenoy says:

    >Manish: Wow. That means a lot of people have started to use the same strategy, meaning there is little use of it.

    You’re right, the dynamics of the market change – every “usable” strategy deteriorates with more people using it!