Posted by Equitymaster

    

Are the golden days of making easy money in initial public offerings (IPOs) over?

At the end of 2020, no one could have predicted that 2021 would be such a prosperous year for IPO investors.

It was a record-breaking for the IPO market in India and around the world.

Around 2,388 IPO deals mobilised US$453.3 bn globally in 2021. This was 60% more in terms of volume and proceeds compared to 2020, as per Ernst & Young global IPO trends report for 2021.

In India, 63 firms raised a total of Rs 1.2 tn through IPOs. This was more than four times the amount raised in 2020 (Rs 266.3 bn).

Looking ahead, it appears the IPO frenzy is far from over. The primary market is seeing hectic activity these days.

IPO pipeline for the year 2022

A slew of well-known firms from the insurance, technology, and healthcare, are poised to dominate the IPO market in 2022.

Several companies have received approval from the market regulator for their IPOs, including Delhivery, Go Airlines, ESDS Software, Skanray Technologies, Emcure Pharmaceuticals, Tracxn Technologies, Fusion Micro Finance, MobiKwik, and many others.

And among the upcoming IPOs in India let's not forget the biggest one of all - Life Corporation of India (LIC).

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LICs' IPO is expected in March 2022. After the listing, LIC will be among India's biggest public companies alongside giants such as Reliance and TCS.

It will be India's largest public issue and will test the capital markets at a time when global stocks have lost US$5 tn.

The upcoming tech IPOs are already facing a reality check now that the recently listed, new-age companies, have taken a massive hit in the market.

Prominent names such as Oyo Hotels and Delhivery are pushing back their public debuts and are thinking of lowering their IPO valuation targets.

Foreign institutional investors (FIIs) have withdrawn money from Indian stocks for more than four months now. Local investors are still suffering from the losses made on high-profile IPOs last year.

In terms of marketcap, these companies jointly raised Rs 390 bn and then erased Rs 2.2 tn from record highs.

Following the disastrous performance of Paytm, as well as the thrashing experienced by newly listed e-commerce companies Zomato and Nykaa, investors have turned their backs on new tech offerings.

Now can we still anticipate the IPO boom to continue in 2022, despite slowing market trend, geopolitical concerns, and rising inflation? Is it the best time for companies to go public?

And if not, let's find out why...

Current market scenario

The major concern for markets currently is inflation and the anticipated rate hike by the US Federal Reserve.

US inflation rate surged to a 40-year high of 7.5% in January as strong consumer demand collided with pandemic-related supply disruptions.

Moreover, the threat of conflict between Russia and Ukraine continues to rattle stock markets.

The interest rate hikes along with slowing GDP growth, and geopolitical tensions have sent global equities tumbling.

These global factors impacted the domestic markets as well. Investors are worried about the flow of money out of the markets.

This unfavourable sentiment can impact the primary market as well.

So far, only three public issues have hit the market since the start of the year. These include AGS Transact Technologies, Adani Wilmar, and Vedant Fashions.

Half of the 63 IPOs in 2021 have dipped below the listing price. About a dozen have slid below the offer price. Among the wealth destroyers, new age companies are at the forefront.

Newly-listed firms bleeding

Due to an aggressive sell-off, shares of newly-listed businesses like Zomato, PB Fintech, and Nykaa have plummeted to new lows.

India's pioneering digital payments start-up Paytm hit a series of lows in the recent past.

The stock of the company has eroded more than half of IPO investors' money in less than three months. It's down about 60% from its IPO issue price of Rs 2,150.

The damage has increased because many of these firms had market values higher than their fundamentals permitted.

The valuation game in India

When it comes to investing in IPOs, it appears that size does matter.

Think about it...

The number of internet-based companies seeking to go public is increasing every day.

Despite making smaller profits, or no profits at all, these firms seek very high valuations than their traditional, listed competitors.

If the trend continues, there is a very high possibility that the market won't support these high prices going ahead.

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After the poor performance of these so-called 'unicorns', retail investors have become cautious and aware about their investments.

According to reports, the hospitality start-up, Oyo Hotels & Homes may explore the option of re-filing the draft red herring prospectus (DRHP) with the market regulator.

Changes in Oyo's IPO plans come at a time when globally and domestically there is a correction in the valuation of tech stocks.

This shows the market's trend is shifting. New IPOs won't be priced at the same high levels.

To ensure this, the market regulator has approved several new measures to further reform the IPO market in the country.

Investors shy away from IPO market on uncertainty

The recent performance of Indian IPOs has not been encouraging.

Looking at the recent IPOs in India, the post-listing performance in the second half of 2021 was lacklustre. This is partly to do with the aggressive IPO pricing and partly to do with market uncertainties.

As a result, investor enthusiasm for IPOs has waned. This has made the primary market less liquid in the last few months.

Further, FIIs are on a selling spree across most emerging markets, including India.

They have sold Indian equities worth over US$7 bn thus far in 2022 - and over US$11 bn since October 2021, when they started to unwind positions here.

The nervousness is also seen in IPO markets as very little to no exposure was taken by FIIs.

The bottomline

It seems the days of excessive liquidity in the Indian markets are over due to FII selling pressure.

The factors behind the FII selling are liquidity-tightening policies taken by central banks the strengthening of the dollar, and rising inflation.

As central banks cut their bond purchases, the financial system becomes less liquid, and interest rates begin to climb.

As a result, many investors are pulling money out of riskier assets like emerging markets and putting it into developed market bonds.

Inflation is also bad news because it causes central banks to raise interest rates. Earnings decline when interest rates climb. As a result, investors are no longer prepared to pay high values and are beginning to withdraw funds.

This could affect the Indian IPO market as well as secondary markets.

Investors must be cautious and evaluate many aspects before investing money in an IPO.

It's important to remember that, like the stock market, IPOs come with risks. Due diligence is essential before investing in them.

There are some precautions you can follow before investing in IPOs. These include studying the company's business, reading the prospectus, and understanding its financial health.

Also evaluate the post-listing valuation of the stock, the background of the promoters, the key management team and all the risk factors.

In the long run, a knowledgeable and well informed investor always wins.

Happy Investing!

{lb~IPOs}

Posted by Equitymaster

    

Over the last few years, debt investments as a whole have left investors disappointed.

Excess liquidity and RBI's measures to boost the economy resulted in lower returns from debt funds. To make matters worse, some corporate bond downgrades too impacted debt funds negatively.

Traditionally, conservative investors have parked their short-term money in fixed deposits (FDs). The savvier ones have used liquid and overnight funds.

With the returns from these funds declining below the inflation rate, and the real rate of returns turning negative, even conservative investors have been lured into investing in the equity markets.

And the numbers are there for all to see...

Equity-oriented mutual fund schemes saw a net inflow of Rs 910 bn in 2021, marking a multi-fold jump from Rs 94.1 bn of the net inflow seen in 2020.

On the other hand, debt mutual funds saw net outflows of Rs 350 bn in 2021 as investors shied away from the category amid a fall in returns and as investors waited on the side lines, anticipating interest rate hikes by the Reserve Bank of India (RBI).

But although equity markets & equity funds have rewarded most investors over the last two years, making money seems to be a tough task from now on.

So, what should investors do?

Could 2022 be a year of debt once again if yields rise on increasing prospects of a rate hike?

While the Sensex crossing 60,000 dominated the news in 2021, what went unnoticed is that overseas funds, which own the bulk of Indian equity assets, quietly bought more of local debt than stocks last year.

FII's purchased Indian bonds worth US$3.4 bn last year as compared to US$5 bn inflows in the pre-pandemic year of 2019.

But in reality, Bonds, on the other hand, received US$4.5 bn through the voluntary retention route (VRR) of the RBI.

By contrast, their net stock purchases amounted to US$3.9 bn for the same period.

VRR investments have to be held for a minimum of 3 years by investors and are counted outside the general debt limit prescribed for FIIs.

The expectation over India's inclusion in the global bond indices may have possibly triggered interest among global investors.

This inclusion is expected to bring in more dollars into bonds raising demand for Indian debt.

Bonds in major economies continue to give negative real returns as bonds trade at dismal lows. This should help Indian bonds as well.

There is also a view that equity markets may have peaked in the short term and the uncertainty over interest rates going forward may push international investors to explore Indian debt securities as they offer relatively higher returns with safety.

Buying Government Bonds Directly from RBI

Following the launch of the 'RBI Retail Direct Scheme', you can now invest directly in government securities (G-secs) by opening an account with the RBI.

Earlier retail investors were not allowed to invest in G-secs directly.

Government bonds are the safest bonds in India since the government effectively guarantees them.

Retail investors can invest a minimum of Rs 10,000 and in multiples thereof in Central Government Securities (CG), State Government Securities (SG) and Treasury Bills (T-Bills).

India's #1 trader Vijay Bhambwani was quick enough to spot this opportunity and record a video last year in June.

Even Vijay thinks this is an exciting new opportunity for savvy investors to build wealth and it will be a great tool in an individual's overall asset allocation strategy.

You would think that considering these bonds offer the highest safety, they should obviously carry the lowest interest rate as compared to say a bank deposit, right?

But that may not always be the case.

Currently, a fixed deposit placed with say HDFC Bank for a period of 5 years yields 5.6% p.a.

On the other hand, a G-sec maturing in 2027 currently yields 5.87% per annum.

Another reason why one may want to buy a government bond is if an investor is looking at fixing an annuity over a long-term horizon.

Traditional debt instruments do not offer products beyond 10 years. On the other hand, RBI has issued 40-year bonds which offer decent returns.

So, should you invest in Government securities?

As an investor, you need to understand the interest rate cycle and maturity of government securities.

In recent times, due to lower rates, people have been reluctant to invest in papers with longer term maturities as they expect interest rates to go higher.

For example, if you purchase a long-term bond with an interest rate of 6.5% and if the interest rate goes up to say 7.5%, the value of your bond would decline. However, this is more relevant to short term investors who park their money in gilt funds and trade in the g-sec market.

Such price movements are not relevant if you buy the bond and hold it to maturity.

For a hold to maturity investor, it is like a fixed deposit with no credit risk. The government is expected to pay up as promised once the tenure of the bond is over.

The current yield on the 10-year government bond (G-Sec) is 6.54% In other words, if you hold the bond for 10 years, you will get a return of 6.54% per annum.

For investors looking at a shorter duration, one can invest in Treasury bills.

Treasury Bills are short-term borrowing tools for the government. They are promissory notes with guaranteed repayment at a later date.

They have a maximum tenure of 364 days; issued in three maturities - 91-days, 182-days and 364-days.

Currently, treasury bills offer yields in the range of 3.88% to 4.66% depending on the tenure.

Another interesting option in an expected scenario of rising yields could be investments in RBI Floating Rate Savings Bonds, which re-adjust their yields in line with interest rate movements.

The floating interest rate is linked to the rate on National Savings Certificates (NSCs). It is currently 7.15% and is revised every six months based on the NSC rate.

Floating rate funds invest in bonds whose interest rates are reset periodically so that the fund earns coupon income that is in line with current rates in the market and eliminates interest rate risk to a large extent.

Finally, for investors looking at a higher yield from government securities, State Development Loans (SDLs) are an attractive option.

State Development Loans (SDLs) are debt instruments issued by State governments for meeting their borrowing requirements/budgetary needs.

These are comparable to G-Secs in terms of safety (just a notch lower), though the financial situation varies from State to State and hence the yields on SDLs are generally higher.

Top issuers of SDLs include Maharashtra, Uttar Pradesh, Punjab, Karnataka, Gujarat, Kerala among others.

Recently, the spread between the 10-year SDLs and the benchmark 10-year G-secs widened to 48 bps.

In an interaction with media a few years ago, Shaktikanta Das, RBI Governor had reiterated the sovereign-proxy status for bonds issued by various states, likely easing investor concern overseas about the risk and reward these instruments offer.

"SDLs (state bonds) are not risky at all. Firstly, the state governments are sub-sovereign and secondly there is an implicit debit mechanism which RBI operates on the due date of repayment, RBI automatically debits the state government account and makes the repayment. So, therefore, they cannot be considered as risky and this position has also been accepted by the Bank for International Settlements," said Das.

Final Thoughts

Current returns from both debt funds and fixed deposits are lower compared to the past.

While this might lead to a temptation to increase the risk in order to target higher returns, we would caution against this approach.

Short term investors should consider investing in debt instruments with a higher allocation to shorter maturity instruments as they would carry less interest rate risk once interest rates change direction and start moving upwards.

There are several types of government securities in India for an investor looking for the safest debt instrument with zero credit risk

These securities provide guaranteed income to help the investor align with the risk factor in your investment portfolio.

In the current market scenario, most experts are mildly bearish on government securities amid forecasts of higher yields.

Going forward, banks may not have much appetite for holding government bonds given the normalising liquidity conditions and the improving economy.

Hence forecasts for 10-year G-sec yields range between 7.5% and 7.8% towards the end of the year.

Debt could be a very lucrative space to watch out for in 2022.

Safe haven securities like G-secs could offer protection against potential stock market turbulence, which may increase as the economy moves into the later-middle portion of the business cycle.

This could be a good time to lock in an investment in government securities at a higher yield for the long term.

Do check out the follow up video which Vijay recorded when the retail direct scheme was officially launched by Prime Minister Narendra Modi.

In the below video, Vijay discussed whether you should take the plunge and invest in sovereign bonds of the government of India.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

Posted by Equitymaster

    

Commercial real estate as an asset class has been out of reach for an average Indian investor.

Let's be honest. Many of us aspire to own commercial properties in the most prestigious localities and rent them out.

Real estate investment trusts or REITs have made this fantasy come true for many investors.

REIT is an entity which pools in resources from various investors and then collectively invests in real estate to earn capital appreciation and dividends. This investment vehicles buys, sells, and manages real estate assets on behalf of investors.

REITs allow you to invest smaller amount of your savings into real estate which otherwise would not have been possible.

All this is done in a hassle free and convenient way without you getting involved in the long process of owning a property.

Simply put, REITs are to real estate what mutual funds are to equity markets. They're publicly traded like common stocks on the stock exchanges.

The first REIT in India was listed back in April 2019. So why are we talking about REITs now, after almost three years?

Well, in the current market scenario when inflation in the US is at a 40 year high (stock markets don't like high inflation), REITs have emerged as a new investment avenue.

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It's increasingly getting difficult for an investor to find out a high-yielding asset class to invest in. That's where REITs come in. They could inflation proof your portfolio.

Many are calling it the investment theme for 2022 and rightly so.

Let's understand why experts are going gung ho over REITs...

• Steady payouts

  In recent years inflation has been muted. But now, inflation is back big time. So, you need a hedge.

  While we have gold and other investment options in a rising inflationary environment, here's how investing in REITs help beat inflation.

  Property prices and rental income tend to rise when inflation rises. In fact, someone who has purchased a property using a fixed rate of interest loan could benefit during high inflation. This supports REITs' dividend growth and provides a reliable stream of income even during inflation.

  REITs are required to distribute to unit holders not less than 90% of its net distributable cash flows in each financial year. This makes them very attractive for anyone who is looking for a regular income.

  So REITs have a checkmark in terms of steady payout.

• Portfolio diversification

  When high risk assets like stocks are performing well, a low risk asset like gold typically won't. When stocks are down, gold is generally stable or up.

  In the same way, real estate is largely driven by almost completely distinct set of factors than what drives stock prices.

  That is why you need REITs in your portfolio. It offers the advantage of diversifying your portfolio and participating in the property market. That too without the hassles and with a minimum investment.

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  Budget 2022 already laid the ground work for a massive capex boom. The focus is clearly shifting to growth at the expense of inflation.

  REITs will help you cash in on the capex boom.

  Apart from this, the demand for real estate is also picking up. A survey showed that around 75% wealthy people will look to buy luxury properties, worth more than Rs 50 m, over the next two years in big cities as well as in holiday destinations.

  That's for wealthy people. But what about the affordable housing?

  Well, the growth in affordable housing over the next few years is likely to be strong as around 22% of the population still do not have adequate housing. With the situation improving gradually, there's already a turnaround in sentiment for the real estate sector.

  By mode of portfolio diversification, REITs can take advantage of the real estate boom.

• Reopening of the economy is good for REITs

  Initially, REITs became very popular because of the dividend yield they offered.

  However, ever since the pandemic, the listed REITs on Indian bourses started to broadly underperform the Sensex. This was because of the growing popularity of work from home. There was uncertainty about the future demand for office spaces.

  But now, companies have called their employees back to office and normalcy is returning. This bodes well for REITs and make them an attractive asset class to invest in.

An overview of listed REITs in India

In India, there are currently three listed REITs - Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust REIT.

Let's take a look at each one...

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#1 Embassy Office Parks REIT

Embassy REIT is India's first publicly listed REIT.

It owns eight high-quality office parks and four prime city centre office buildings with 33.6 million square feet (MSF) of completed leasable area.

It also has an under construction and development pipeline of 9 MSF.

In addition to the offices, it also owns two operational hotels with 477 keys, an under-construction hotel with 619 keys, and a100 MW solar park.

The company is backed by Blackstone Group, which has been actively investing in the Indian real estate market since 2010.

For the quarter ended December 2021, Embassy REIT declared a payout of Rs 4.9 bn or Rs 5.20 per unit. For fiscal 2022, Embassy REIT has now cumulatively declared year to date (YTD) distributions of Rs 15.6 bn or Rs 16.50 per unit.In fiscal 2021, it had declared a cumulative distribution of Rs 21.48 per unit of Rs 18.4 bn in total.

The quarter under review was a good one for Embassy REIT where it saw rental collections of over 99%, similar to last year.

The REIT's IPO price was Rs 300. Since its listing in early April 2019, the stock has risen 24% to Rs 388 as of Monday's close.

For 2022, the company has upped its guidance and will declare Rs 21.70 per unit despite the Omicron wave marginally affecting some segments.

This would result in a dividend yield of 5.7% on the current price.

Another key metric which investors need to consider is the book value of the REIT. Like mutual funds declare their net asset value (NAV) daily, REITs disclose their NAVs semi-annually or annually.

So it's important to check whether the REIT is trading at a discount or at a premium to its book value.

Embassy REIT is currently trading at a discount of 2% to its book value of Rs 388.26 as on March 2021.

#2 Mindspace Business Parks REIT

Mindspace REIT was the second REIT to list on Indian exchanges. It is managed by the K Raheja Corp Investment Managers.

In the most recent quarter, Mindspace Business Parks REIT leased over 1.8 m square feet office spaces, taking its overall leasing to nearly 4 m square feet for the first nine months of the financial year.

It declared distributions of Rs 2.8 bn or Rs 4.64 per unit for the December 2021 quarter with most of it being tax-exempt. In the September 2021 quarter, it had declared a distribution of Rs 2.7 bn or Rs 4.60 per unit.

In fiscal 2021, the cumulative distribution to unit holders was 9.59 per unit.

The Mindspace IPO offer price was at Rs 275 per unit. It has gained 19% since its listing in early August 2020. Its units currently trade at Rs 358.

Mindspace REIT offers a dividend yield of 5.2% while it is currently trading at a premium of 4% to its book value of Rs 345.2 as on March 2021.

#3 Brookfield India REIT

The last one to join the party was Brookfield India REIT.

Brookfield India Real Estate Trust REIT is an India-based commercial real estate vehicle. The investment trust's portfolio consists of campus-format office parks. Its commercial assets are located in Mumbai, Gurgaon, Noida, and Kolkata.

For the quarter ended December 2021, Brookfield REIT declared Rs 5 per unit in dividend to unitholders on the back of strong leasing momentum. It leased 5.36 lakh square feet office space across its assets with additional expansion options of 2.91 lakh square feet during the quarter.

The recent payout takes the cumulative dividend distribution for fiscal 2022 to Rs 17 per unit.

The units were offered at Rs 275 per share. Currently, they trade at Rs 311.

Out of the three, Brookfield REIT has the highest dividend yield at 6.5% and also the highest occupancy rate.

It is currently trading at a discount of 3% to its book value of Rs 317 as on March 2021.

As can be seen, the listed REITs are offering good dividend yields through quarterly distribution which cumulatively amount to more than 6% at their current prices.

An important point to note here is that the 3 listed REITs in India deal with 'A' grade office space and boast of quality assets, leased to the best companies across the world. That's why even in the pandemic, their collections were around 99%.

According to Anarock, a leading real estate services company, leasing activity has picked up pace and is already witnessing growth. All the three REITs have declared their results for the quarter which indicate the positive trend.

In conclusion...

Surely, you will be excited now to take a close look at REITs and diversify your portfolio. But there are a few things to remember before you invest.

The main motive of REITs is to generate income and not earn capital gains. REITs are to provide an income stream in the form of rents/interest and leave some scope for capital appreciation.

So if you are investing in REITs, you need to understand their income generation capacity for a given period. You'll have to check their cash flow stability.

For instance, if a REIT doesn't see optimum occupancy post-pandemic or loses its negotiating power with customers, then it would earn a lower distributable surplus.

Now comes an important point: The tax on the dividend payouts declared by REITs.

The dividends earned from REITs are included in your total taxable income and taxed as per the slab applicable to you.

But that's not always the case.

For instance, Mindspace REIT distributes over 90% of payouts in the form of tax-free dividends. The other two - Embassy and Brookfield are still working on improving these measures. Brookfield's latest payout of Rs 5 per unit only considered 34% of this to be tax-free.

To conclude, REITs are catching up big time which is proving to be good for the real estate sector.

The performance of listed REITs has opened the door wide open for real estate companies to come out with their REITs. Going forward, we may see more REITs to be launched in India.

Developers such as Oberoi Realty, DLF, Prestige Estates, and Phoenix Mills, who own sizeable commercial property assets, may come out with their REITs.

As we discussed above, the three listed REITs in India deal with 'A' grade office space and boast of quality assets. They have the best tenants.

But this could change in future as more REITs are rolled out. So always stick to the highest rated REITs.

As more REITs list over time, there will be more options available to investors. Either way, this is one space that retail investors need to track in 2022. This asset class can be a safe way to beat inflation.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

Posted by Equitymaster

    

• 'In the short run the stock market is a voting machine. But in the long run it's a weighing machine'. - Benjamin Graham, the father of value investing

Understanding this quote holds the key to investing in stocks in 2022.

What does 'voting machine' and 'weighting machine' mean?

By weighing machine, Ben Graham meant stock prices will move based on fundamentals alone...in the long run.

By voting machine. he meant stock prices, in the short run, are driven by people's emotions: Greed and fear.

This raises the question, what drives the emotions of greed and fear in the stock market?

Here's the answer...

Narrative is the fuel for greed.

Uncertainly is the fuel for fear.

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We have seen narratives in all their glory in 2020 and 2021. Narratives i.e. stories were spread far and wide about the economic recovery and why you should put all your money in stocks.

People believed the stories. Investors and traders alike thought the market could only go up.

But 2022 has seen uncertainty take hold.

After bottoming out in March 2020, the stock market has been on a relentless rally. From a level of 7,600, the Nifty soared to 18,500 by October 2021. A gain of nearly 2.5 times in a little over 1.5 years.

It was truly a spectacular rally. Never has the stock market gone up so fast, so much, for so long, without a meaningful correction.

But things have changed now. The market is behaving very differently. It's no longer being driven by the emotion of greed.

Fear, driven by uncertainty, is now in charge.

And accepting this reality is the key to investing in 2022.

A Demanding Stock Market

If fear is the dominant emotion, doesn't that mean stocks will go down?

And if so, shouldn't you sell and stay on the side lines? Or even better, short the market?

Alas, it's not as simple as that.

People like to think in binaries. 1 or 0. Yes or no. Good or bad. Right or wrong. Up or down.

This kind of binary thinking certainly helps to simplify our decision making. It's fast. It frees the brain from additional hard work.

It's also useful in many situations in life when deep thinking is not needed.

This is true in the stock market too. Often, Mr Market will offer you a great deal like it did in March 2020. In such situations, your decision buy or sell is very easy.

But most of the time, the stock market does not offer you such simple buy/sell opportunities. Most of the time, you will have to put in a lot of thinking effort to make sense of what's going on.

And that is not everyone's cup of tea.

This is what you face in 2022. The year of 2022 will likely go down in history as the year of uncertainty.

And that means, the stock market today demands higher-level thinking. Simple statements like, 'The market will crash', or 'The market will go up', are unhelpful.

The volatility in the market is so high that it's impossible to predict stock prices with any certainty.

Anything could happen.

The market might stop falling tomorrow.

The market might stay flat instead of going up or down.

The market might fall some more but just when the bulls have given up, it could reverse and start to rise again.

Or the bears might finally win and the market could crash.

Which of these scenarios is most likely?

No one in the market, not even the so called 'experts' you see on TV every day, can answer this question. The market is in a situation now where any number of possibilities are on the table.

And all this is just for the short term. If you were to think about the long term, then there are even more possibilities.

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What's the Solution?

Ever since the crash in 2020, the bulls have not faced even single serious market correction. Even the second covid wave didn't result in a crash.

The market has relentlessly transferred money from the bears to the bulls for a year and a half. As a result, the bulls are sitting on enormous amounts of money...and they don't want to lose it.

This is perfectly natural. The richer one becomes, the more one worries about losing it all.

And that explains the recent nervousness in the market.

Sure, there are other reasons too - inflation, rising interest rates, many geopolitical worries (Ukraine, Middle-East, Taiwan), another covid variant, GDP growth falling short of expectations, and more.

But most important of all is the fear of losing all the gains made since March 2020. Investors have made so much money, so fast, they're unsure what they to do now that the market isn't going up.

What Should You Do?

There are two parts to the answer. It all depends on what you want to do in the market.

Do you want to trade or do you want to invest?

If you want to trade, the answer is to develop a good trading system and constantly evaluate it.

You also need a rock-solid risk management process to prevent losses.

Your trading system will tell you how worried you should be. If it's screaming warning signals at you, then you should take your money out of the market. If not, you can hold on to your trades.

But you must have a stop loss in place, no matter what.

If you want to invest, you will need to follow a good investing system. Your system must consider your investing objectives, risk appetite, and time horizon.

Here are some pointers...

Be prepared to buy high quality stocks in 2022. If the market suffers a crash, even the fundamentally strong stocks will crash.

And that will be a great opportunity to buy high-quality stocks at a reasonable price.

You can find stocks like these in the Equitymaster Stock Screener. It's very user friendly and you can create your own customised watch lists.

Check out the Equitymaster Stock Screener here.

Also, you need to stay away from fundamentally weak stocks. Don't invest in any company that's making losses.

Equitymaster's co-head of research, Rahul Shah, has prepared a list of what he calls toxic stocks of 2022. You should avoid all of them.

Watch Rahul's video for more...

Avoid high debt companies. Corporate India is in a debt re-payment phase. If the companies you've invested in still have too much debt, then it's time to re-think your portfolio.

Check out India's listed debt free companies in Equitymaster's Stock Screener.

And here's something important. Be very selective with smallcaps.

If you've made money in smallcaps in this bull market, and want to continue investing in them, we have some words of caution.

Your task will be difficult in 2022. The easy money in smallcaps has been made. The low hanging fruit has been plucked in 2021.

If there is a crash, smallcaps will be ones to fall the hardest. Keep that in mind. Remember, your hard-earned money is at stake.

Having said that, there are still some great buying opportunities in the market. It's just that you will need to be very selective with smallcaps in 2022.

Change Your Strategy

The bulls made so much money, they become overconfident. Some investors believed the market would keep going up in 2022 and beyond. And any correction will be small.

The market has already proven them wrong.

And that's why we recommend a change in strategy.

In the bull market, almost every stock you bought went up. But that won't be the case anymore.

The market has woken up to the reality that many stocks, even fundamentally strong bluechips, are very overvalued...and they cannot sustain their high PE ratios.

But it's just about specific stocks. The entire market is at risk of a serious correction. Not the 5-10% variety we've become used to...but a meaningful one.

We recommend you become very strict with your investment process. You must have very clear pre-defined rules for buying and selling any stock in 2022.

Your pre-defined rule for buying could be investing in a growing, fundamentally solid company at decent valuations. This rule will be very useful in a correction.

Your pre-defined rule for selling could be to exit when the fundamentals take a turn for the worse or there is an adverse, structural shift in growth.

These two rules, along with the pointers above, should help you not only avoid bad stocks but also buy high-quality stocks in case of a market crash.

In Conclusion...

Investing in 2022 won't be the same as 2021.

It won't be year of investing blindly in the stock market. Your chances of losing money are higher compared to last year.

Thus, you will need to be more cautious. Pay more attention to fundamentals...and to valuations.

Be prepared to handle a lot of uncertainty.

And finally, don't forget the right asset allocation. This is what Equitymaster recommends.

Stay Safe!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

Posted by Equitymaster

    

Initial public offers (IPOs) had a great outing in 2021. There were a lot of offers by traditional companies. But the notable features during the year were the startup IPOs.

From online food aggregators to online insurance brokers, to online pharmacies, 2021 will be remembered in history as the year of tech startup IPOs.

India's startup sector has seen a flurry of IPOs in 2021, which includes the likes of One 97 Communications (Paytm), the largest ever IPO in India.

There were other major companies too which successfully raised funds via the IPO route. There was Zomato, Policy Bazaar, Nykaa, and the most recent Star Health and Insurance.

Even though they were loss making companies, a few tech startups were attractive to retail investors, fetching good returns.

The reason behind this? Most companies came out with their IPOs during a bull market. The sentiment was good and the liquidity was ample. Indian stock market was one of the best performers in 2021. Many companies were emboldened to come out with their issues.

However, none of the high profile companies made it to the list of top performing IPOs of 2021. Instead, the list saw companies from the defence, chemical, and pharma sector topping the charts.

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Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Rahul Shah's Handpicked Midcap Ideas for Long-Term Investors

Our co-head of research, Rahul Shah, identifies midcaps with strong fundamentals and growth potential.

Discover His Latest Recommendations

Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com

In this article, we take a look at the five best performing Indian companies that went public in 2021.

All data is as of 21 December and the performance is based on the issue price of the company.

#1 Paras Defence & Space Tech

The company which tops the list of top performing IPOs of 2021 is none other than Paras Defence & Space Tech.

The IPO of Paras Defence & Space Tech saw a massive response from investors and was fully subscribed within the initial hour of sale.

During the three-day bidding process, Paras Defence IPO was subscribed 304 times!

In October this year, shares of Paras Defence & Space Tech made a blockbuster debut, listing at a hefty premium of over 171% above its issue price of Rs 175.

On the listing day, shares of the company closed at Rs 498.75. That's a gain of 185%. And just when we thought this was huge, more gains kept rolling in.

Shares of the company currently trade at Rs 683, a 291% gain from the issue price!

If you were allotted even one lot of the shares at an investment amount of Rs 15,000, your initial investment would now be worth more than Rs 57,000. Those who got shares in the IPO nearly tripled their money within a few minutes of the listing.

Even if you had invested Rs 1 lakh in the company after its listing at Rs 498, your investment amount would have appreciated by 37% in just two months.

So what's so special about this defence company which got investors excited?

Well, the company is a critical player in India's defence and space research segment. It's the only Indian provider of essential imaging components for space applications, such as large scale lenses and diffractive gratings.

While there are other Indian companies which make defence equipment, none of them have the product portfolio of Paras Defence. It makes products for defence and space optics, defence electronics, electro-magnetic pulse (EMP) protection solution, and heavy engineering.

It has the capacity to offer a diverse variety of goods and solutions, bolstered by high-quality products and operational performance. Paras Defence is also increasing its reach in international markets.

Paras Defence also has a checkmark against its management quality box. The company's management has three decades of experience in designing, developing, and manufacturing of a wide range of engineering products and solutions for defence and space sector. The team includes several ex-employees of Bharat Electronics and Defence Research and Development Organisation (DRDO).

Its clients include big names like ISRO, DRDO, Bharat Electronics, Cochin Shipyard, Hindustan Aeronautics, Bharat Dynamics, Tata Power, Tata Consultancy Services (TCS), and Alpha Design Technologies.

While it derives most of the revenues from the top 5 clients, many are government organisations. This reduces the counter party credit risk. The company has been able to generate fresh order inflows over the past four financial years.

Finally, the company has the advantage to benefit from the drone revolution. As investors are falling head over heels with companies associated with 'drones', Paras Defence, via its subsidiary Paras Aerospace, has tied up with a few drone manufacturers in Israel, Latvia, & Italy.

All this just goes on to show that Paras Defence holds immense promise in lots of areas.

#2 MTAR Technologies

No surprises here as another company with a background in defence technology, forms this list.

Defence is considered to be a new field for conventional businesses. A few years back, there was nothing significant happening on the defence front. There was little for the financial press to write on the defence sector. But now, the government has pushed for strengthening India's armed forces.

The 'Make in India' and 'Atmanirbhar Bharat' initiatives combined with an import ban on certain defence items have paved the way for the development of the domestic defence industry.

MTAR Technologies caters to manufacturing various machine equipment, assemblies, sub-assemblies, and spare parts for energy, nuclear, space, aerospace, defence, and other engineering industries.

In March this year, shares of MTAR Technologies made a stellar debut, listing at Rs 1,082.3 on BSE, a rise of 88% from the issue price of Rs 575.

Its Rs 6 bn IPO was met with robust demand. The issue was oversubscribed within a few hours of the first day and was eventually subscribed a whopping 200 times on the final day.

Stock Picks: Rahul Shah's Handpicked Midcap Ideas for Long-Term Investors

From its issue price, it is up around 280%.

What's so special about this company?

MTAR Technologies' promoters and management team have a diverse industry experience of more than 20 years. So, as far as management is concerned, there's nothing to worry about here.

The products manufactured by MTAR Technologies have a tolerance of about 5-10 microns. These products require critical tolerances as they go into nuclear reactors and space launch vehicles. Till date, the company hasn't faced a single blemish.

Due to the fact that MTAR caters to highly technical and complex work, its customers have stayed intact over the decades.

The company has a long and established relationship with most of its customers - DRDO, Nuclear Power Corporation (NPCIL), LPSC, and ISRO, which spans more than 35-40 years with repeat orders.

The company has much to show on the financials front. Its revenues have grown at a CAGR of 25% over the last five fiscals through 2021. Revenue is expected to grow at the same pace given the healthy offtake from its key customer Bloom Energy Corporation, NPCIL, and ISRO.

With little or no debt, cash surplus in its books, investors' enthusiasm for this company is justified.

#3 Nureca

Third on the list, we have Nureca, a company engaged in the business of home healthcare and wellness products under the brand "Dr. Trust".

Nureca is a digital-first company, which sells products through online channel partners such as e-commerce players, distributors, and retailers. It also sells products through its own website - drtrust.in.

In February this year, Nureca made a strong debut and listed at Rs 634.95, a premium of 59% over its issue price of Rs 400. It closed the day at 667 with 67% gains overall.

This was a short IPO worth Rs 1 bn which was subscribed 39.93 times in total.

The gains kept on rolling even after Nureca's solid debut. Shares of the company traded in a range for the initial two months. Then in mid-April, shares started to gain traction and rallied some more.

From its issue price of Rs 400, Nureca currently trades at Rs 1,437 which implies a gain of 259%. Rs 1 lakh invested would have turned Rs 3.5 lakhs in just a matter of 10 months.

What makes Nureca's business exciting is its asset-light business model. The company enters into agreements with vendors who manufacture the products as per the specifications. This allows Nureca to quickly scale its operations at a predetermined cost without incurring any capital expenditure on manufacturing facilities.

Nureca does not invest heavily in physical assets such as plant and machinery, land, and property. This allows the company to be capital efficient.

Since the pandemic, Nureca has seen acceleration in consumers demand shifting from offline channels to online channel. This is very positive for Nureca which is solely focused on digital sales channel.

Capitalising on this trend, Nureca saw a very strong growth in its results due to robust demand for quality preventive healthcare products. This was supported by shifting consumer demand and restricted movements due to the lockdown.

The company's financials are also what makes it an investment candidate. Nureca has recorded 122% CAGR growth in revenues over the past three fiscals. Its net profit has also grown at a 44% CAGR during the same period.

Nureca Financials

The company is continuously penetrating into new geographies and launching new products. Its diversified portfolio, growth in the home healthcare segment, and higher online channel mix will drive profitability in the years to come.

#4 Laxmi Organic Industries

Next on the list we have a specialty chemical company - Laxmi Organic Industries.

Laxmi Organic Industries made a decent stock market debut in March 2021, listing at a 20% premium over its issue price of Rs 130. On the listing day, the stock closed higher by 27% at Rs 164.6.

Currently, the stock trades at Rs 396. That's a 205% gain from the issue price.

As the specialty chemical market was booming at that time, the Rs 6 bn IPO was a big hit. It received 106.81 times subscription.

India is considered the fastest-growing market for specialty chemicals in the world. For instance, the agrochemical, pharma, and textile industries depend heavily on a steady supply of specialty chemicals for their day to day activities.

What makes the company special is that it is the largest manufacturer of ethyl acetate with over 30% market share in the Indian ethyl acetate market.

Laxmi Organic is the only manufacturer of diketene derivatives in India and has one of the largest portfolios, with about 34 diketene products. It meets close to 55% of the domestic demand for diketene derivatives while the balance is imported, mainly from Europe and China.

Diketene derivative products entail technologically-intensive processes and are highly hazardous in nature (leading to restricted transport). That is why local supplies of the same are preferred by Indian customers, leading to higher penetration and higher market share.

This year, the company also entered into the fluorochemicals segment, which experts believe, may open up new growth avenues for Laxmi Organic and help expand margins.

Over the years, Laxmi Organic has allocated a good sum to its Research & Development (R&D) segment which has helped it expand in terms of production volume and product portfolio.

#5 Easy Trip Planners

Last on our list we have Easy Trip Planners, the parent company of online travel aggregator platform EaseMyTrip.

The company, which made its stock market debut in March this year, got listed at 10% premium to the IPO price of Rs 206 per share. But since listing, the stock has soared over 150%.

Even though the company received over 150 times subscription, we saw a muted listing.

Since its issue price of Rs 187, the stock is up around 192% and currently trades at Rs 546.

The sharp rally in its stock can be attributed to the optimism among investors for the travel and tourism sector because of the revenge travel and re-opening trade.

The dividends announced by the company are also enticing investors. The company first announced its first dividend in April 2021, a month after its listing on the stock exchanges. Later, the company declared an interim dividend of Rs 1 per equity share for fiscal 2022 that ends in March next year.

Adding to positives is the company's profitability. Easy Trip Planners reported an over 330% growth in its net profit and 164% in revenue in the most recent September 2021 quarter.

The company has been profitable since its inception. It's the only profitable player among key online travel agencies (OTAs) in India.

Easy Trip Planners is a dominant player in domestic air ticketing. While the company has the largest agent network in the Indian OTA industry, it also ranks second in terms of air ticket volume and third in terms of gross booking revenue (GBR) and number of registered customers.

The company has a wide distribution network, the largest network of 59,274 registered travel agents to be precise!

The profitable business model wherein it does not charge convenience fees to the customers is what separates Easy Trip Planners from competitors and helps build a loyal customer base. Generally, other OTAs and airline websites charge a convenience fee of Rs 300 per person. EaseMyTrip waives this fee.

All these points certainly make Easy Trip Planners special from competitors.

Which other companies performed better in 2021?

Apart from the above five, here are other companies which are trading significantly higher than their issue price.

Top Performing IPOs of 2021

Amid the ongoing IPO mania, investors are increasingly looking to make quick and appealing returns by putting their money in the shares of a company going public.

The idea here is to make listing gains through the purchase and sale of shares in a public issue.

However, there is no guarantee that a stock will always open at a gain. For instance, the IPO of Easy Trip Planners received whopping response and was subscribed more than 150 times. But on the listing day, it made a tepid debut.

This just shows that even if IPOs get massive subscription, it doesn't automatically mean that it's a great company or a great investment.

If you had stayed put till now, you would be sitting on 3x gains as Easy Trip Planners went on to gain over 180% post listing.

Hence, it is wise to invest in companies with longer horizons. Invest in an IPO as a long-term option than a profitable proposition at current juncture.

This goes without saying that the companies should have solid fundamentals and good long-term growth prospects.

One must also understand the business of the company along with the risks involved in investing.

Most of the recent IPOs have untested business models and have been priced at exorbitant valuations.

So, if you're not comfortable investing in these new businesses, don't compromise on the margin of safety. Wait to see how they execute after listing and only then take the plunge.

Buying stocks at steep valuations during IPOs could just as well mean a compulsion to hold on to them for many years without meaningful returns.

Happy Investing!

Posted by Equitymaster

    

The Reserve Bank of India (RBI) in its state of the economy report said 2021 could be India's year of initial public offerings (IPO).

Well, turns out that's true not just for India, but for the rest of the world as well.

So far in 2021, a total of 1,821 IPOs have come out globally. Of this, 106 have come out in India.

By the end of 2021, another 10 IPOs are expected to list on the bourses in India. The total funds raised through these IPOs is expected to reach Rs 1 tn.

The Indian IPO market in 2021 is not just different due to the number of IPOs, but also due to the enormous amount of participation it has seen from retail investors.

In the financial year 2021, a total of 14.2 m new investors participated in the stock markets. In the first quarter of the financial year 2022 alone, 7.1 m new retail investors became a part of the financial market.

To a new investor, IPOs look extremely promising. The listing gains are huge and offer a great opportunity to make money in the short term.

But here's something you need to know before investing in an IPO, whether you are a first-time investor or not.

IPOs can be very risky.

Keeping the risks in mind, here are a few points you can consider before investing in an IPO.

#1 Define your objective

Before investing in an IPO, it's important to define your goals.

Are you applying for listing gains, or are you looking for a prospective candidate for your long-term portfolio?

Some IPOs can give excellent listing gains, while some may list at a discount initially, but can be an excellent pick for a long-term portfolio.

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Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Rahul Shah's Handpicked Midcap Ideas for Long-Term Investors

Our co-head of research, Rahul Shah, identifies midcaps with strong fundamentals and growth potential.

Discover His Latest Recommendations

Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com

Take the case of Zomato. It gave close to 65% returns on the listing day. For investors looking for short term gains, this would've been an excellent opportunity.

However, since its listing in July 2021, the shares of Zomato have fallen. They are now up by only 12%.

On the other hand, shares of Anupam Rasayan India listed at almost 5% discount to its issue price in April 2021. However, the company's shares have zoomed 70% in the last eight months.

You cannot predict whether an IPO will list at a premium or a discount. It depends on multiple factors.

But if you are a first-time investor, it's always better to invest for a long-term horizon. This will help you ride out the volatility in the short term.

#2 Understand the business

Warren Buffett said, 'Never invest in a business that you don't understand'.

For a listed company, there are endless sources of information. But for a company that is not public yet, the draft red herring prospectus (DRHP) is the gold mine of information.

By reading the DRHP you can identify a businesses' strengths, potential opportunities, and risks. You can also gauge how the company might perform in the medium term and long term.

If a company's business model is beyond your understanding then tracking its progress will be difficult.

FMCG companies such as Nestle have a simple business model which can be easily understood. They earn revenue by making and selling consumer products. You can easily track the growth of such companies.

However, new age tech companies like Zomato have complex business models.

Zomato leverages technology to deliver food to your doorstep. It also offers other services like listing restaurants and their menus for people to dine out.

The backend processing that takes place in terms of technology and coordination of manpower can be confusing to understand for some. Hence, tracking the growth of such businesses is difficult.

Do not invest in any business that you find confusing.

#3 How is the company going to use the funds?

Every company has to disclose why it is going for an IPO and how it will use the funds.

You will find this information in DRHP under the 'Objects of the Issue' section. Here the company will explain in detail how they plan to use the funds.

Why is this knowledge necessary to you?

There are two reasons...

First, it's your money. Thus, you're entitled to know how it will be used.

Second, by knowing how the company will use the funds, you can ascertain the sustainability and viability of the business.

Try to gauge whether the company is using the funds for growing its profits or not. If yes, then you can evaluate it further to check if it's a good investment.

#4 Why are existing shareholders selling their shares?

When a company goes for an IPO, it's often because existing shareholders intend to sell their shares rather than raise funds through a fresh issue.

In such a case, all the proceeds go to the promoters and not the company. Hence, you have to be extremely careful before investing in such companies.

You can start by asking yourself why are the existing shareholders selling their shares?

Sure they might be booking profits. But you can always get a sense whether they are exiting to take advantage of a high valuation.

Take Paytm for example. More than 50% of the funds raised by the company were through an offer for sale by existing shareholders.

The market also thought the issue was overvalued. This resulted in the company's shares listing at a discount to the issue price.

#5 Look at the company's financials

This is the most important section for any business.

In the DRHP, you will find information about the company's profitability and financial position under the 'Financial Information' section.

Why do you need to look at the company's financial statements?

By studying the financial statements, you can see how much revenue the company is making, how much it's spending, and how much profit it's earning.

Stock Picks: Rahul Shah's Handpicked Midcap Ideas for Long-Term Investors

A profitable business has higher chances of surviving in the long run than a loss-making one. If a company's financial profile is strong, the shares will automatically perform well at the stock market.

Take Paytm for example, the company has consistently reported losses in the past five years. As a result, the shares of the company have performed poorly despite it being a popular brand.

The popularity of the brand doesn't determine its performance at the stock market. Its fundamentals do.

Look for a company with strong fundamentals and a robust financial profile to invest in.

#6 Valuations

You might have read analysts' reports that say, 'The IPO is valued at Rs 200 m'.

What is this Rs 200 m?

It's the value of the company. A company hires experts to value its business based on performance and other factors.

But what does it mean for investors?

In value investing there is a concept called intrinsic value or true value. This measure determines the actual worth of a business. Based on the intrinsic value, you can determine whether the IPO is overvalued or undervalued.

An undervalued stock means, it's underrated by the market. In other words, the company's shares are trading below their actual value.

This means the stock has good growth potential or upside and minimal downside risk. It's better to invest in an undervalued business as it offers a margin of safety for investors.

#7 Management background

It's very important to check the background of the people running the company. Promoters and management are the main pillars for the company. They are the ones who will take the company forward.

A company with a strong management team indicates better prospects of future growth.

Take the case of Hindustan Unilever.

The company has been known to have a solid management team and one that follows good corporate governance practices.

The same can be seen in its ever growing share price.

On the other hand, companies such as Satyam saw its share price crash due to a fraudulent management.

To conclude...

Investing in IPOs is a risky affair.

Thirty out of the 106 IPOs listed so far have listed at a discount to the issue price. Many have done well too but you never know how the company's shares will perform in the long term.

Take the case of ICICI Lombard. It listed at a discount of 2%. However, in the last four years, the company's stock has doubled.

If you had exited the share on a listing day, you would've incurred a loss and also would've missed out on a huge long-term profit.

In a volatile IPO market, new investors end up taking the wrong decision in the heat of the moment. Don't let that happen to you.

Participating in the stock market can be very exciting. But don't let your emotions get in the way of your decision making.

When investing in an IPO, it's always better to do your research and proceed with caution.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more here...

Posted by Equitymaster

    

• 'You don't want to get into a stupid game just because it's available'.

This is what Warren Buffett said back in 2016 at Berkshire Hathaway annual meeting.

In investing, just because an investment works well for others doesn't imply it's wise.

This piece of advice given by Mr. Buffett is correct.

Just think of the success of IPOs. The year 2021 has turned out to be extremely good for India's primary market. 59 companies raised funds via initial share sale.

However, India's largest initial public offering (IPO) till date, Paytm, showed the world that high profile IPOs can fail too.

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Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Rahul Shah's Handpicked Midcap Ideas for Long-Term Investors

Our co-head of research, Rahul Shah, identifies midcaps with strong fundamentals and growth potential.

Discover His Latest Recommendations

Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com

Back in the year 2008 the story of India's IPO failures was best shown by the Reliance Power's IPO.

Even the magic of the Reliance brand failed to keep the company afloat.

During that time, the consensus among investors was that its shares would list for at least double the issue price.

But the market had other plans for the company on its listing day. The stock debuted at a tiny premium, but quickly fell, and it never returned to its issue price.

The buzz around Reliance Power's public issue is very similar to what is currently being experienced by new-age companies.

According to a report, a total of 108 companies from the new economy sector, with a valuation of US$435 bn are IPO ready.

CMS Info Systems, MobiKwik, Oyo, Skanray Technologies, and Byju's are few of the firms that have either floated their IPOs or are planning to do so in the near future.

Other let-downs

Is Paytm the largest wealth killer among Indian IPOs in 2021?

Not really.

There have been a slew of failures. Paytm is only one of them - albeit the largest. There are, in fact, a few well-known names on this list.

CarTrade Tech, Kalyan Jewellers, Krsnaa Diagnostics, and Aditya Birla Sun Life are currently trading more than 20-25% below their offer price.

List of Worst Performing IPOs of 2021

Many investors lost their money on the IPOs of about more than 10 firms this year.

Can high valuations be the reason behind the story of unsuccessful IPOs

When it comes to investing in IPOs, it appears that size does matter.

Think about it...

The number of internet-based companies seeking to go public is increasing every day. Despite making smaller profits, or no profits at all, these firms seek significantly greater valuations than their traditional, listed competitors.

For example, last month, by filing paperwork with the market regulator for its public issue, logistics start-up Delhivery has joined the IPO race.

We all know that the logistics industry is not new.

However, the US$5.5 bn valuation that the 10-year-old firm is apparently pursuing is over 2.5 times the market price of Blue Dart, a 38-year-old established company.

On the other hand, Oyo, hotel-room aggregator, is apparently seeking a valuation three times that of Tatas-owned Indian Hotels.

Moreover, the euphoria of owning a piece of these well-known brands has caused a new generation of young, tech-savvy investors to enter the market.

Since the pandemic, retail investors, both young and elderly, have flocked to the stock market. This rush is being fuelled by the advent of app-based trading platforms that provide seamless onboarding and trading experiences.

Excess liquidity in the market is also one of the core reason behind the high valuation of these IPOs.

What we can learn from these debacles...

Despite the pandemic, the IPO industry has been thriving.

Even in the hottest markets, though, things may quickly turn sour. Some of the biggest brands managed to flop spectacularly on their debut.

Here's a look at what we can learn from the IPO failures going ahead.

1. Don't ignore valuations: Investing in a firm entails paying the 'correct' price for its stock.

The basic method to investing does not need to alter whether the firm is listed or an IPO.

Is the company doing well? Will it be able to constantly increase sales and earnings while increasing its market share? What strategic advantage does it have? Is the management trustworthy or do they have a shady past? All of this will tell you if you have the 'correct' stock.

Investment bankers frequently assign a high valuation for the company, leaving no room for regular investors. So, are you ready to pay a premium valuation for an IPO when you can buy its listed counterpart at a lower price?

Essentially, you should examine an IPO in the same way that you would any other publicly traded business.

2. Don't look for quick returns: The most appealing aspect of IPO investment is the possibility of making rapid profits.

Investing in IPOs to profit from listing gains is a risky endeavour.

Rather, consider investing in it with a long-term view. Instead of thinking about short-term gains on listing, consider if it's worthwhile to invest in it even if the stock market were to close for the next ten years.

Stock Picks: Rahul Shah's Handpicked Midcap Ideas for Long-Term Investors

3. Don't believe in everything you read or see: Newspapers, web media, social media and so on, subtly promote the concept of IPO investing to you.

They are used by large corporations to create a favourable environment for IPO investing since the firm is making its public debut.

Do your own research before blindly following anyone from your social media apps or some other unreliable source.

4. Plan well before applying: Seasoned investors usually have a plan that is based on facts and data.

However, first-time investors sometimes succumb to the guessing game and invest in IPOs that appear to be receiving an overwhelming response in the market.

If you don't have a good strategy in place you won't have an end objective. Your investing pattern might be rather irregular as a result.

This, in turn, may cause you to become a reckless investor, resulting in larger losses if you are not careful.

The best way to avoid this error is to first create a clear strategy before applying for any IPO.

Determine your objectives first and only then develop a strategy. Be prepared to do a fact-based investigation into the financials of the company before investing.

5. Big names doesn't mean big gains: This is another common misconception.

We feel big names are so well-known that investing money in these firms is a secure bet. This isn't always the case.

We have already given you the example of two eminent companies who failed their investors - Reliance Power and Paytm.

Whenever such brands make their way into the Indian markets, make sure you do not fall for it because of their name.

Back in September 2021, lead smallcap Analyst at Equitymaster, Richa Agarwal in one of her videos talked about how to pick the next winning IPO.

In the video below, Richa shares some qualities that could help you avoid scammy IPOs, and pick the ones with the highest potential to create long term wealth.

Now that you've checked out the IPO duds of 2021, do take a look at the ones which performed exceptionally well, i.e. the best performing IPOs of 2021. We've also discussed what makes these companies special...

Last words

These are among the most common mistakes investors make when applying for any IPO.

It's critical to examine each IPO separately and weigh all the advantages and disadvantages.

Don't get distracted by the pomp and circumstance, or by what others are doing.

Always remember to look beyond the listing benefits when investing in an IPO.

Think long-term and focus on those firms with good promoters with a track record of governance.

Finally, choose IPOs that are accessible at 'decent' valuations.

Happy Investing!

Posted by Equitymaster

    

Since the beginning of the calendar year 2021, the Indian mutual fund industry has launched over 100 New Fund Offers.

They capitalised on the upbeat sentiments in the capital markets. These rollouts have been Multi-cap Funds, Flexi-cap Funds, Mid-cap Funds, Value Funds, Sector & Thematic Funds, Balanced Advantage Funds, Passive Funds (Index Funds and Exchange Traded Funds), international Fund of Funds (FoFs), and a few debt-oriented schemes.

More than Rs 75,000 crore was garnered through various scheme launches, both active and passive. It appears that investors, perhaps perceiving NFOs to be cheap, have fallen for the Rs 10 NFO proposition.

This is at a time when interest rates on traditional investments are low and inflation is playing a spoiler by eroding the purchasing power of money.

But, we believe there are some good reasons why you should say no to NFOs...

#1 Not all NFOs are unique

You see, after SEBI's categorisation and rationalisation guidelines for mutual fund schemes, most fund houses are trying to fill up the gaps in their product basket with NFOs.

In order words, they are simply trying to realign and re-bundle products without the underlying investment strategy and the portfolio being always unique.

With more schemes, the fund managers who are already managing 5-7 schemes (some with large AUM), are burdened further.

This also makes it difficult for them to own a unique underlying portfolio.

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What changes to some extent is the composition of the respective security in the underlying portfolio.

Thus, when you are approaching NFOs, you need to study the fundamental attributes of the scheme, mainly the asset allocation, type of securities it will invest in, the fund's investment strategy, its investment objective, among other things.

Do not blindly subscribe to it just because the NFOs are offered at Rs 10.

Consider if the scheme can really add value to your portfolio. If you already own some of the best mutual funds of the same category and sub-category, you don't need that NFO.

#2 Most NFOs are launched when market momentum is favourable

Have you seen fund houses launching schemes when the markets have corrected significantly? Not many, right?

This is a bit worrying because most fund houses launch their NFOs during the exuberant market phase. By then, it's likely the market rally has excited you, a fact mutual fund houses are aware of. Thus, they float NFOs during such times.

Besides, most investors usually tend to invest in market-linked instruments when the future looks bright, and not in a gloom-and-doom scenario.

As a result, NFOs do the rounds when markets have scaled new highs, valuations look stretched, and the margin of safety is narrow.

Thus, the respective fund manager's chance of getting good bargains while constructing the portfolio is limited.

To generate some quick profits, they subscribe to IPOs (or stand as anchor investors) to make listing gains. However, the risk is when these IPOs fail to post listing gains or the market falls.

Most often, the NAV of such funds also take a hit and falls below the offer price of Rs 10.

So, do not get wooed with NFOs launched in an exciting phase of the market. Never make investments when your emotions are high and markets are scaling new highs.

Being wildly bullish can cost you dearly. History has proved that not all NFOs have been able to create wealth for investors.

#3 The cost of investing may be high

To manage every mutual fund scheme, a mutual fund house incurs sales & marketing expenses, administrative expenses, investment management fees, registrar fees, custodian fees, audit fees, etc.

All such costs are collectively included in the Total Expense Ratio (TER) of the scheme. This is levied as a percentage of the respective scheme's daily net assets. In other words, TER has a bearing on the scheme's Net Asset Value (NAV).

As per regulatory guidelines, the maximum TER an actively managed equity-oriented scheme and debt-oriented scheme can levy, is 2.25% and 2.00%, respectively.

On the other hand, for passively managed funds and close-ended funds, the TER is 1%. As the AUM of the respective scheme grows, a low TER is levied.

In addition, SEBI's regulations allow mutual fund houses to charge up to 30 basis points (bps) more if the new inflows come from retail investors from beyond the top-30 cities (B30) cities. This is done essentially to encourage inflows from the smaller tier 2 and tier 3 cities.

In the case of NFOs, initially, since the AUM size of the mutual fund scheme may be small, you could be bearing the higher TER. The fund house has the flexibility to do so as per the regulatory guidelines.

Remember, a high TER levied on the scheme could affect your overall returns, at least till the size of the scheme increases and it performs admirably.

#4 NFOs have no track record to rely on

An NFO does not have a performance track record and the only way to make an informed decision is from the information you have access to in the Scheme Information Document (SID).

This means you, the investor, have to thoroughly understand the investment objective of the scheme, its risk traits, the asset allocation, where it shall invest, the investment strategy to be followed, how it will benchmark its performance, and who will manage the scheme, among a host of other aspects, before you can subscribe to the NFO.

When you sift through most SIDs of a respective category and sub-category of mutual funds, you may find it challenging to differentiate the best one for your portfolio. In addition, you cannot merely count on the performance of other mutual fund schemes from the same fund house to make a judgement.

But when there is an assessable performance track record (of at least three years), making an appropriate choice becomes fairly easy.

If data of a longer period is available, you could even evaluate how the fund has fared across market phases (bull, bear, and consolidation) to check on the consistency with which the fund has delivered returns.

This makes it possible to gauge the scheme's returns vis-a-vis the level of risk taken. But in the case of NFOs, you do not have access to this vital quantitative data to make a prudent choice.

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#5 You have existing mutual fund schemes to choose from

Relationship managers, mutual fund distributors, or investment advisors often insist that the NFO is great because it's an offering from a fund house with a large AUM and/or it will be managed by a star fund manager.

You should counter-argue that there are many other fund houses with smaller AUM and managed by relatively not so popular fund managers whose existing schemes look well poised to deliver stellar returns backed by their investment process and systems.

The existing mutual fund schemes that have completed three years and witnessed market phases could be a better choice. The fund manager may be holding a robust portfolio that has stood the test of time.

While past performance is not necessarily indicative of the future returns, it at least stands as testimony or indicates whether you should consider investing in the respective existing scheme or give it a miss.

When you are considering existing mutual fund schemes to add to your portfolio, evaluate them on the following parameters:

• Returns over various time frames - 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 10-year, and since inception.
• Performance across market phases (i.e. bull and bear phases) in case of equity-oriented schemes.
• Performance across interest rate cycles (upward and downward) in the case of debt-oriented schemes.
• Risk ratios (Standard Deviation, Sharpe, Sortino, etc.)
• The AUM and expense ratio of the scheme.
• Portfolio characteristics. In the case of equity funds, the top-10 holdings, top-5 sector exposure, how concentrated/diversified is the portfolio, the market capitalisation bias, the style of investing- value, growth, or blend - and the portfolio turnover. In the case of debt funds, the average maturity, modified duration, and the quality of debt papers.
• The quality of the fund management team (experience of the fund manager, the number of schemes he/she manages, the track record of these schemes, the experience of the research team.
• And the overall efficiency of the mutual fund house in managing the investors' hard-earned money i.e. the proportion of AUM actually performing.

If the investment strategy and calls taken by the fund manager prove right in times to come, it could potentially yield you respectable returns.

Final words...

Going forward, as mutual fund houses launch more schemes, do not make the mistake to add that new fund to your portfolio enthused by the Rs 10 proposition unless it's absolutely unique and deserves taking some calculated risk.

Outsmart the opportunistic fund houses, their relationship managers, and mutual fund distributors/investment advisors. They consider you to be a fool and want to grow their business at your cost. Whatever is offered, whether it is an NFO, IPO, or investment advice, in the words of Euripides, 'Question everything'.

Diversify your portfolio intelligently by considering investments that are suitable to your risk profile, investment objective, your financial goals, and the time in hand before those envisioned financial goals befall.

Do not end up over-diversifying your portfolio. Over-diversification does not help create wealth beyond a point. All it does is make the portfolio look bulky, increases the burden of monitoring, and does not necessarily reduce your portfolio risk.

Last but not the least, whether it is mutual funds, stocks, bonds, or deposits, zero in on the best ones.

And once you invest, make it a point to review and monitor your portfolio. This will ensure you are on track to accomplish those envisioned financial goals.

Happy Investing!

This article has been authored by PersonalFN - a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinions on investing.

Posted by Equitymaster

    

'Is the rich world aware of how four billion of the six billion live? If we were aware, we would want to help out, we'd want to get involved'. - Bill Gates

The pandemic has shown us how the world unites in the face of adversity.

We united against this deadly virus and went all out to help those in need in terms of monetary help to staff or distribution of dry ration kits, and meals to the less fortunate, providing cars for ferrying patients to hospitals or providing oxygen cylinders across various cities.

NGOs and organisations working towards relief activities recorded a tremendous spike in donations over the past two years.

But do we really need to wait for a tragedy of this magnitude to make us realise the fragility of human life? Aren't there already enough issues ailing us that need our attention and intervention?

Having the power to improve the lives of others is a privilege that comes with its own sense of obligation.

How India donates

In India, religion plays a large part in influencing the way an individual donates.

It is common to see huge amount of wealth being donated to places of worship or to a godman having a cult like following.

Needless to say, most of the times there is little or no accountability in terms of where these funds are used. It is all done in blind faith!

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A handful of donors use the internet to 'research' about NGOs before donating to them purely based on popularity, social media ads or word of mouth recommendations.

Then come those who 'donate' to political parties or the ubiquitous funds set up by the Central and State Governments. Whether such contributions can be considered as 'charitable giving' or not is a different conversation altogether.

There's also a category of donors - known to all of us - who believe in helping the less privileged in their own circle, typically their domestic help, chauffeurs, etc. Provide groceries, garments or maybe even sponsoring the cost of education of their children.

These donors want to do social good and make a difference. But due to a lack of knowledge about NGOs or maybe due to a trust deficit, they choose the simpler philanthropic journey rather than a structured and strategic one.

The people in the last category of donors are those who are extremely clear and fixated on the cause they wish to support because of how strongly it resonates with them. E.g. A donor who has seen a loved one suffer from terminal illness will support an NGOs working to provide a better life to the terminally ill.

In order to see the 'impact' of our donations, it is imperative that we, as donors, see beyond our immediate circle and broaden our horizon. Think of supporting well-structured programs of NGOs that support the society at large.

After all, we are the product of the environment we live in. We cannot expect to have a secure home without a safe neighbourhood.

Why should you donate?

Your money is yours to spend but resources belong to the society. We all know there are countless people in the world living in unimaginable situations with a scarcity of resources.

For India to be a stable society where opportunities are created for millions to further their lives, it's imperative that we support the many good NGOs who help the less fortunate of our country and provide them with opportunities to flourish.

We know from our years of study of NGOs that a vast majority of them strive hard to raise funds for their programs. They often do not have the bandwidth, expertise or access to manage fund raising campaigns. Thus, they end up wasting valuable resources in the process.

By giving to charity, you are participating in a cause that is much larger and more significant than yourself. Research has shown that those who give to charity find themselves experiencing an overall improved sense of happiness.

Crowdfunding is a 'cool' trend that has gained momentum in recent times where do-gooders invite friends and family to donate to NGOs/ causes they are supporting.

There are millions of NGOs in India. How can you choose a 'good' one?

Globally there are 10 million registered NGOs and of this, 3.3 million are registered in India. It is reported that a very small % of these have complied with filing annual returns with the Registrar.

In India, nearly 22,600 NGOs are registered to receive foreign donations under the Foreign Contribution (Regulation) Act, 2010 (FCRA). Since 2011, nearly 20,600 NGOs have lost their registration because they were in violation of the FCRA law.

Also, due to some notorious NGOs who are exposed by the media periodically, there is a huge trust deficit among the donor community and there is a need for transparency in the social sector!

HelpYourNGO (HYNGO) has been set up with the goal of promoting transparency in the social sector and helping donors make donation decisions in an enlightened, strategic, and impactful manner.

As a donor transparency should be of paramount importance. Your first choice of NGOs should be the ones who are transparent about disclosing how your donations are being used and sharing periodic program reports.

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It' your right as a donor to be informed. Another important factor to consider is the percentage spent on beneficiaries i.e. how much of your donation is actually reaching the end beneficiary and how much is spent on overheads and marketing expenses.

Needless to say, an NGO with a higher percentage spend on beneficiaries should be preferred.

On HelpYourNGO, you can find and donate to 650+ NGOs across 13 causes that have been financially and qualitatively assessed, beyond statutory fiscal audits using structured, and systematic analytical tools.

Arriving at the percentage spent on beneficiaries is our USP. Users of our website find this extremely valuable in making their donation decisions.

Our Research Analysts have highlighted how some of the extremely popular NGOs spend an exorbitant 35% on marketing expenses - if you were aware of this, would you choose to support such an NGO?

Just as you do not rely merely on desktop research or hearsay for planning your financial journey, you must consider seeking the advice of experts to assist you in effectively planning your philanthropic journey!

How to decide on a cause to support?

There are a lot of do-gooders in this world - we've all read about the wealthy pledging their assets for social causes - but there's a lot more that needs our attention and resources.

Education, health, livelihood, women empowerment, gender inequality, rural development and several others.

Pick any cause that you can resonate with and is aligned with your beliefs. If you can align your philanthropic journey with your core area of work, that could be a beautiful marriage. A finance professional may choose to support programs imparting financial literacy, a car manufacturer may choose to support a program that provides skill development training to the underprivileged, an artist may choose to support a school that exposes underprivileged children to different forms of art.

Pick any cause/s that you're enthusiastic about and support a credible NGO vetted/recommended by an expert.

How frequently should you donate - One time or Recurring?

The answer is simple. Are you looking at making an impact?

If yes, your philanthropic journey must be strategically planned keeping in mind what change you wish to see in the targeted beneficiaries/community. Do you reckon a one-time donation can achieve that?

HelpYourNGO launched the Systematic Giving Plan (SGP) in 2018 - a first of its kind initiative in the world - which enables mutual fund investors to contribute 10% of their investment with any Mutual Fund to be directed towards supporting credible and vetted NGOs.

The objective is to create a steady stream of fund flows for genuine and vetted NGOs working towards various UN SDGs and causes. SGP allows NGOs to focus on implementing the great work that they do, rather than wasting resources on fund raising - which they may not be good at.

University endowments and foundations invest their corpus for long term capital appreciation. E.g. Harvard University's endowment has built a corpus of over US$40 billion (2020). Bill & Melinda Gates Foundation Trust endowment was US$49.8 billion (2019).

Typically, the earnings/capital distributions from these endowments tend to fund 30% to 50% of their annual operating budgets. Imagine if NGOs in India could rely on a similar pool of capital to implement their work!

No amount is too small to give. You could choose to give as little as the amount you'd spend on one month's OTT platform subscription fees or as much as you'd spend on buying a new house, or more.

Have an SIP? How about starting an SGP (Systematic Giving Plan)!

We are aware that steps by the regulator, SEBI have already revolutionised the Indian mutual fund industry.

Collectively, there is approximately Rs 37 trillion of Assets Under Management (AUM) in the equity funds. Even if 1% of this corpus would move to SGP units for distribution to NGOs for furthering the UN SDGs, which would be Rs 370 billion of AUM.

And if 10% of this was disbursed each year to hundreds of NGOs, that would be Rs 37 billion every year! That's the potential cascading impact of SGP!

Quantum Mutual Fund is the first fund house which plugged its systems and investor base into the SGP framework and branded their product as the SMILE facility.

The power of small (or large) pooled donations via the SMILE units has the potential to systematically support NGOs selected by individual investors. Like the Harvard University, these NGOs can then focus on improving the impact of their great work.

Products like SGP can leverage partnerships to unlock opportunities for stakeholders working towards social change and build a more equitable and just world.

In an era where we are meant to do more than just focus on profit, let's opt for this simple but powerful Systematic Giving Plan unit and help India achieve the SDGs.

A Systematic Investment Plan secures our future. A Systematic Giving Plan could secure the future of millions.

And the future of our nation.

Conclusion

Take a moment to think of the legacy you wish to leave. How much is enough? Or is it ever enough?

When do you say I have enough and now it is time for me to start giving back to society?

Life is busy, and it can sometimes be easy to forget to express gratitude for all that we've been given...do it while there's still time!

Again, there is no right or wrong but as Helen Keller said, 'Alone we can do so little; Together we can do so much'.

Posted by Equitymaster

    

The flood of IPOs in 2021 has been historic.

First of the blocks were the likes of IRFC, Kalyan Jewellers, and Brookfield REIT. They set the trend early in the year for the mega IPOs to follow.

Then investors went crazy with Zomato and Power Grid InvIT in the middle of the year.

Finally, Nykaa, Policy Bazaar, and Paytm completed the frenzy towards the end of 2021.

In between some big IPOs hit the market. Marcotech Developers, Aditya Birla AMC, Sapphire Foods, Chemplast Sanmar, Nuvoco Vistas. They all attracted investors to varying degrees.

It's estimated that the funds raised by all these new public issues this year will exceed Rs 1 trillion!

2021 was indeed a record breaking year for IPOs. But what about 2022?

If you're interested in making big money from IPOs next year, this editorial is for you.

Let's dive in...

What will be the big IPOs of 2022?

As per the news in the last week of December 2021, there are 4 big ticket IPOs lined up for 2022. These are widely anticipated by investors.

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Life Insurance Corporation of India (LIC)

This is the biggest one of course.

The latest news is that the company and its investment bankers are ironing out the valuation of the IPO. It's expected to hit the market sometime in the January-March quarter.

This IPO is crucial for the government too. The IPO funds will help it achieve the fiscal deficit target.

Byju's

This IPO has been hyped and is widely anticipated.

India's biggest EdTech firm has been reported to be in the pre-IPO phase. It's expected to file its IPO papers with the market regulator after the end of the financial year. The IPO could hit the market in mid-2022.

Ola

India's biggest ride-hailing aggregator is also looking at an IPO next year. News reports say it's looking for a valuation of around US$12-14 bn.

Ola is different from most tech startups in that it's profitable. It's IPO is sure to be well received in the market.

Delhivery

This could be the first of the big IPOs of 2022. The company has already filed its IPO papers with the market regulator.

The size of the IPO could about Rs 50 bn.

These are only the big ones. There are others too, like MobiKwik, which could hit the market in 2022.

As long as the market sentiment remains bullish, we can expect another flood of IPOs just like in 2021.

So what is the best way to profit from these IPOs?

A Different Way to Achieve IPO Riches

Most people, when they discuss making money from IPOs, are only interested in listing gains.

And that's understandable. Many IPOs have provided handsome profits upon listing. As there is a gap of only a few days between applying for an IPO and booking profits, it's an enticing bet.

But there is a better way. It's possible to make even more money than listing gains with less risk.

How?

Think of IPOs as unlisted businesses

The management of a business that comes to the market for the first time will have to change the way they run their business.

After an IPO, they're responsible for thousands, even millions, of individual shareholders.

They have to open up the company to very high levels of public scrutiny from investors, regulators, and the media.

They have to a lot more transparent than before in terms of providing information and disclosures.

They have to follow many more rules than they did before as an unlisted company.

All this requires a big shift in mindset.

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And to be honest most people who run these firms are just not ready for the challenge on day one.

They were only interested in raising money from the public, not looking after their interests.

That's why you see share prices of many newly listed firms fall after the IPO. It's because the market figures out what the management is all about.

Now here is the important point...

This may not be a bad thing. Sometimes the management just needs some time to get up to speed with the new reality of being a listed company.

Investors may not always be correct in blaming the management if the stock price drops after listing. It could be a case of misplaced expectations.

This is why it's best to think of a newly listed company as an unlisted company.

They may be listed but they will need time to start operating as a professionally managed company.

In the interim, the stock price may go up or down or sideways. That's fine. If you have invested in the IPO, take the time to understand how the management is trying to manage this change.

Are they communicating clearly about how the IPO funds are being spent? Are they misallocating the money?

How are they implementing their plans to improve the company's sales and margins? Will the future be better than the past?

If the management made any short-term post-IPO promises, did they keep their word?

Don't take the management's words at face value. Check their words with their actions. Did they follow through on their promises? If not, why? Are they trying to shift the goal posts?

Remember to think of it as a still unlisted company.

This will give you insight into how responsible the management is with your money.

If they don't appear to be behaving in an ethical and professional manner, your choice is simple: Sell the stock.

You may suffer a loss. They stock may have crashed. Yes, that's possible but it's better to get out at that time.

On the other hand, the stock may have gone up.

That's great. But you should still sell.

Sooner or later, the market will wake up to the fact that the management is not trustworthy.

What if you find the management is doing a good job?

In that case, assuming the stock is not too expensive, consider adding to your position.

All this time don't forget to maintain a good asset allocation. Don't put all your money in just one or two stocks. Here is Equitymaster's suggested asset allocation based on marketcap.

How long should you hold an IPO stock?

Well there are very few genuinely great stocks which you can hold forever.

Thus, don't be surprised if you find that you may have to sell your IPO investment sooner that you expected to.

Here's the important point...

In the long run, it's very likely that your IPO investment, no matter what the initial hype was, will just end up as just another ordinary stock.

In other words, the only things that will matter in the long-term will be bread and butter fundamentals - earnings growth, return on capital, sales, margins, cash flow, dividends, etc.

This is why you should consider booking profits if your IPO investment beats your return expectations.

To Conclude

We recommend you follow this simple checklist.

Is the management delivering as promised? Yes/No?

If No, then Sell.

If Yes, then check the stock price and implement point #2.

Has the stock outperformed your expectations? Yes/No?

If Yes, then book partial profits and repeat #1 after 6 months to 1 year.

If No, then hold on and repeat #1 after 6 months to 1 year.

This way you will cut your risk significantly while profiting from any upside, based on how the management is adapting to the new reality of being in charge of a listed company.

This is a better way to invest in IPOs than approaching them only from the point of view of listing gains.

We hope this new way of investing in IPOs will help you build more sustainable wealth from IPOs with lower risk.

Happy Investing!