The route to winning in IPO's

An IPO or an Initial Public Offering, generally elicits a great deal of excitement in the investor community. Basically, an IPO is the first time that a privately held company offers its shares to the general public. The excitement stems from two factors.

• One, it gives you access to a new company which was previously not traded publicly.
• Two, it is generally believed that IPOs give you a one-time opportunity to make big gains by buying low and selling high

Keeping the above two factors in mind, it would be safe to assume that people who invest in IPOs always end up successful. Right?

Actually, that is wrong. Let’s understand why very few people are actually successful IPO investors. Assume that Kinnari Shah subscribes for 10,000 shares at a price of Rs. 100 per share in the latest IPO which has garnered a lot of public attention. Due to the high number of people subscribing for the IPO, Kinnari only gets allotted 100 shares. This is much lower than the 10,000 shares for which she applied. Thus, Kinnari is already disappointed. Now, on listing day, the stock lists at Rs. 150 and makes a high of Rs. 180. Seeing the sharp movement and dejected over the small allotment, Kinnari sells her 100 shares at Rs. 150, making a profit of Rs 50 per share. This was a fundamentally strong company. However, since Kinnari was not able to do much research about the company she had only invested for listing day gains. After a year, the stock is trading at Rs. 250 due to its strong fundamentals. Now, Kinnari is feeling even worse since she missed out on the big gains of Rs. 150 per share.

A lot of things did not work in Kinnari’s favour

1. She did not get the quantity for which she had applied – This is common in IPO investing. Individual investors are given the least priority in an IPO while institutional investors are given preference. For retail investors, it’s somewhat like a lottery and occasionally, for ‘hot IPOs’ retail investors could receive nothing as well.
2. She had only invested for listing day gains – Kinnari was more interested in listing day gains. While she did make some money, she missed out on the larger gains.
3. Kinnari was unable to do adequate research - It’s difficult to research unlisted companies, review multiple documents and data, and make an informed decision. As a result, investors often end up exiting the stock too early, thereby missing out on the big gains.
4. It is also possible that Kinnari could have made losses - Since she had not been able to research the company, it could actually be an overvalued stock. This means that instead of listing above the subscription prices, it could have listed below the subscription price. In that case, Kinnari would have lost money.

Clearly, due to the above challenges, many investors are not actually able to capture the true benefits of investing in an IPO. At the same time, investing in IPOs is a great way to get access to good companies that have a strong growth potential. This is especially true today when innovative companies across all industries are approaching the capital markets. In order to truly benefit from these emerging opportunities, you should consider investing in a mutual fund scheme that invests in recently listed IPOs.

An IPO focused fund that can meet your needs

The idea is to invest in a good company and earn not just from listing gains but the actual growth potential of the newly listed company. These funds do the necessary research and then invest in select IPOs that are fundamentally strong and can potentially witness good growth. If Kinnari had invested in an IPO fund, she would have benefited in the following ways:

• Kinnari would not need to worry about finding data and doing research just to invest in the best IPOs. The responsibility of research and selection now lies with the fund manager.
• Kinnari would not be tempted to cash out on listing day. Instead, by staying invested in the fund, she could potentially capture higher gains.
• She would most likely get a bigger share of the pie vis-à-vis the 100 shares that she got allotted.
• She does not need to worry about timing the market or liquidity.

An IPO fund is like a great opportunity knocking at your door. If you are an equity investor who wants to benefit from the growth potential of IPOs, then an IPO fund might be the right choice for you.

An investor education initiative by Edelweiss Mutual Fund

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