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7 Solid Reasons for NO IPO Investment Strategy

After many years, Initial Public Offers (IPOs) are enjoying rather 'achhe din'.

Almost Rs.14,000 crores were raised through IPOs in 2015, the highest amount in last 5 years. And 2016 could, possibly turn out to be still better.

Warning: Don't touch IPOs.


Here are my 7 solid reasons, for exhorting you to avoid investing in the IPOs.

1. Concentration Risk
Historically, it has been observed that one should diversify the total investment, across a number of companies. This "considerably" reduces the risk. You can achieve this quite easily by investing in a mutual fund scheme. Whereas, while buying shares in an IPO, you are investing in a single company. Since, this exposes you to very high risk, IPOs may not be a good idea.

2. Lump Sum Risk
Historically, it has been observed that for best results, one should invest the total amount in a series of small sums, spread over many months (commonly known as the Systematic Investment Planning). Whereas, buying shares in an IPO is a one-time affair. This, again, may not be a good idea.

3. Incompetence Risk
To make money from equity, investing in a "good" company is of paramount importance. Good company is one which has 'good product', 'good management', 'good profitability' and most importantly a 'good price'. This analysis is beyond the capacity of a lay investor. Ideally, we should leave stock selection to the experts, as in the case of mutual funds. Hence, unless you "thoroughly" understand the company, investing in its IPO is not a good idea.

Don't be lured by rosy promises of massive returns on IPO investment.

4. Pricing Risk
In IPO pricing, there is often a conflict of interest. Promoters and the private equity / venture funds, who are off-loading their stake, would like to get as high a price as possible. But, higher the price, lesser are the chances of you making money. In this tug-of-war on price, common investor has often been a loser. Investing in aggressively priced IPO is, therefore, not a good idea.

5. Information Risk
Since the company is not yet listed, comparatively speaking much less is known about it, vis-a-vis the listed ones. It is not easy to detect the damaging facts and figures, even in the widely tracked companies [remember Satyam?]. So, with the unlisted companies, this information-gap is even larger. Given numerous (equally good, if not better) alternatives, buying into an unknown entity, is not a good idea.

6. Taxation Risk
Listing gains are taxable. Selling your shares in less than a year, is considered as short term capital gains (STCG). There is a 15% tax (+ cess and surcharge, as applicable) on such gains. It is only when you hold the shares for more than one year, that the profits become tax free. So, investing with the prime purpose of making a profit on listing, is not a good idea.

7. Allotment Risk
Good companies will attract huge over-subscription. Naturally, therefore, only a nominal number of shares would be allotted to each investor. As such, even if the listing price is double or triple the offer price, your absolute gains would be an inconsequential amount; not worth the effort and (many) risks. Given the chances of making, at best a very limited money, IPOs is not a good idea.

Concluding: Investing in IPOs is definitely not the right approach for the retail investors.

Instead, you should opt for SIPs in a well-balanced and diversified portfolio of mutual funds.

Trust me! You will be lot "richer", lot "safely" and lot "surely".

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