Selection of the Best IPO for Investment

    Selection of the Best IPO for Investment 

The year 2020 was famous for multiple reasons. however, the most alarming ones include firstly due to covid 19 pandemic and secondly due to the flood of IPO which hit the secondary market.

                                                             Fig 1. IPO 

  In this digital age, there are several companies led by first-generation entrepreneurs who are doing extremely well within the country and globally, after establishing themselves in the primary market, they are eying to expand the product line further and establish a footprint worldwide. To do so huge capital is required and for that public participation becomes mandatory. That's why these companies are jumping into the sea of the stock market with the intention of making a big name. There was a time in the 1990s when investors /Participants used to experience huge first-day listing gains, and huge long-term gains also. But nowadays all companies hitting the market with IPO are getting listed at premium valuation with very little scope of future gains.  Most of the IPO subscribers nowadays also get disheartened with their IPO prices going to red the very first day or when it takes a downhill path in the long term. one can easily make out from these situations that there is no sure-shot way of making money from the subscription of every IPO. Hence, finding a good IPO that is getting listed at the correct valuation is a paramount important factor for generating money from initial public offerings. It is difficult to shift through the riffraff and find the IPOs with the most potential, but certainly not impossible. A good IPO investment has certain traits. If you can get most of it right in the IPO you are planning to invest, then your chance of getting lucky is more. So, here are some IPO tips one must follow before subscribing to it. 

1. Objective Research

If you are thinking of doing objective research by yourself, mind you it is not an easy task to discern the correct and accurate information about the company likely to go public. Unlike listed companies which are extensively covered by various analysts, very little information generally remains available in the public domain for the unlisted companies hence it is a herculean task to obtain the correct financial health of the company. Though companies are supposed to disclose the information in the Red Herring Prospectus, we have to understand that it is prepared by the company itself and they always try to shield the grey areas. The 3rd party websites may have been compromised to give biased views and the investment banks and brokers will have their own vested interests to portray the company they support in a good light. So what IPO subscribers should do..?

So, the rule is, look for the inclination of anchor investors before it opens for a subscription. Do not hurry to subscribe to the IPO on the very first day. Wait till the last day and look for the subscription of IPO in (QIB) Qualified Institutional Buyers category, If it is oversubscribed, then you can trust that IPO because the Institutions have better penetration into the Company's internal data than the retail individual investor. And you can be sure that the institutions will not put in their money where it won’t grow.

 

2.  Leafing through the Prospectus.

As discussed above the companies try to conceal the unfavorable information from coming to the public domain while filing for IPO. However, the information divulged in the prospectus is generally correct. So it is always advisable to pursue the prospectus as it provides glimpses of possible risks and opportunities associated with the company.

                                                                    fig 2. RHP 

Also, companies disclose the action plan in terms of possible utilization of the capital which they are planning to generate from the listing on the stock exchange. Utilization of generated capital becomes another key factor that helps to decide should you subscribe for an IPO or give it a miss. Suppose they plan to utilize the generated capital for organic/inorganic growth, or enhancing the product line and expansion, which makes the optimistic future outlook of the company then you must think to subscribe to such IPO. Contrary to that if a company is planning to clear the debt out of the generated corpus then it may be worth giving IPO a miss. 

3.  Credibility of the Broker/Underwriter 

Companies always choose underwriters very carefully based on certain criteria. However, If the underwriter is a big investment bank like Goldman Sachs or Morgan Stanley or any big investment bank then generally they would not like to associate their name with the company which has undisclosed issues.  so if the investment bank which is helping the company in bringing the IPO into the market is strong and has a proven track record. Then chances are bright the IPO will be worth buying.

4.   Invest at cut-off price

As you know the IPO always comes with a price band the lower price is called the floor price and the upper price is called the Cut- off price. If you are a retail individual investor and you are keen on increasing the chance of getting shares allotted then bid at the cut-off price. It will increase the chances for your application to be considered, whatever may be the final allotment price.

5.  Look at the valuation

Valuation is the toughest parameter to conclude for retail investors. This process is extremely technical. Investment bankers and underwriters judge the quality of management and returns before arriving at the final offer price. Compare the valuation of the IPO in India in the secondary market with a listed peer based on sector and the ratios then it will help you to decide should you subscribe to the IPO or give it a miss.

fig 3 .Valuation

6.   Select a good broker

Opening a Demat account with a good and famous brokering house sometimes assists you to get the allotment in the most-sought after IPOs which are quite hard to get. There are brokers or  IPO portals that can open the door to new and interesting IPO stocks. They may have enough connections to ensure decent allocation for you.

7.  The Bottom Line 

Successful companies regularly go public but finding the apt opportunity and valuation is a tedious task. But it is wrong to say that all IPOs should be avoided, though. Some investors who bought the stock at the IPO price have been rewarded handsomely by the companies in question.

Just keep in mind that when it comes to dealing with the IPO market, skeptical investors with their fingers on the pulse are likely to see their holdings perform much better than those who are trusting and ill-informed. So be informed and take the right decision based on all the above-mentioned parameters. Finally,  I will conclude by sayings 

“ Moneywise be Wise “

 

Personal Finances of Defense Personnel

If we assess the personal financial profile of defense personnel there would be a very small number who actually manage their finances well and are able to generate adequate corpus to meet the personal financial goals comfortably by beating the inflation in the short span of service. The problems such as Paucity of time, separation from family, remote locations, and instability due to regular transfers and shifting are a few of the prominent difficulties which adversely affect financial planning. Lack of knowledge about the deeply rooted financial world due to being away from the mainstream, and absence of credible financial advisors are few other important factors that further aggravate personal financial management. 

Two important scenarios and their effects 

The factors which we have discussed above lead to non permanency and put the financial planning on the backburner. Whether, staying with family or staying separated from family are the two prominent scenarios. Both of these have their own challenges and requirements for money management. While most of the time defense personnel stay separated from the family mostly due to service requirements such as being posted to non-family stations and in far-flung areas and sometimes due to personal problems such as nonavailability of good schooling or some other family conditions. In such conditions, the expenditure would be double first being the personal expenses and second finances which would be required for maintenance of family at other location. Contrary if staying together poses a different set of problems shifting of luggage damages settling down at new location school admission etc leads to heavy outflow of money.  In both scenarios, adequate liquidity is the most important factor. The requirement of liquidity can be fulfilled by the regular remuneration however it is important to keep at least 5 months salary in a fixed deposit which can be made available as and when the requirement arises.  

Popular investment instruments of armed forces personnel.

One of the traditional and most popular methods of saving for decades is by putting the money into DSOP (Defence services officers provident fund ) /AFPP (Armed forces personnel provident fund ) depending upon the rank structure, which gives a compounded return and helps to generate the larger corpus in the long run. Serving defense personnel save a percentage of their basic salary in the DSOP fund. These funds are one of the best ways of creating a sizable corpus for goals, such as buying a house and have the requisite liquidity during retirement years. As a newly recruited in the armed forces, this should be one’s starting point. Get a decent sum deducted each month and increase the subscription during a field tenure or posting to a CI Ops, since additional allowance is given while expenses are lower. Avoid withdrawing from it since that destroys compounding. Finally, since DSOP subscription takes care of deduction u/s 80C, there is no need to invest in any instrument for tax-saving purposes. However, The recently presented Budget has made interest in PF contributions beyond Rs 2.5 lakh taxable. This leads to revisiting financial planning again. Other than DSOP/AFPP  there are many other instruments available in the market which are comparatively less risky and generate good corpus in the long run.

Systematic investment plan in Index mutual funds 

A mutual fund is a  big market and nothing is free here. We often hear people saying “mutual fund Sahi hai”. It is true but we need to consider many factors before selecting the correct mutual fund which suits one's goal and does not require consistent monitoring. The few most important factors to be considered are the expense ratio and the size of the AUM (Asset under management)  and the past performance of the fund manager managing your fund. However, If we believe in the growth story of our country which is the fastest emerging economy and as per BBC news India By 2050,  is projected to be the world’s second-largest economy (overtaking the United States) and will account for 15% of the world’s total GDP. By analyzing the past figures, it will be understood that investing in the index mutual fund turns up to be a good decision in the long run. The BSE(Bombay stock exchange ) popularly know as Sensex started with 100 points at the time of its inception in the year 1979 and in fy 2021 it has touched 50000 points thus if we consider CAGR (Compounded annual growth rate ) It will be 15.96% over 42 years which no other asset class has given and since the economy is growing the Sensex will also grow in future and it does not require constant attention. It is suggested to avoid thematic mutual funds until one has sound knowledge of market movement and tracking the market regularly.

Equity Allocation 

 Create a portfolio of equity to beat the high inflation in the long run, with long-term goals, such as retirement plan, child’s education, child marriage, etc. While DSOP gives the predictable compounding effect, equities give the magical flavor in the portfolio if selected properly for value investing. If we take an example, the cost of education in India is skyrocketing. In 2007, the cost of a Medical Degree was 15.50 lakhs. In 2017, the cost of a Medical Degree rose to `41.43 lakhs. In 2027, the cost of a Medical Degree, assuming a 10% rate of inflation, will be appx. 173 lakhs. Thus, it is crucial to invest a part of the savings in an asset class that can beat inflation and ensures that money will grow to match future money needs. 

Some DOs

1.Due to the paucity of time it is always advisable to have a compact and clean portfolio that does not require consistent monitoring. 

2. Spend Less Than You Earn, it is a very good practice for wealth creation if you spend less you save more, and with the saved amount you will be able to create a big corpus. 

3. Live a debt-free life. Avoid unnecessary loans and multiple credit cards. While a home loan is fine. Don't fall prey to credit card companies. 

4. Keeping heavy money in fixed deposits should be avoided because interest earned is taxable and keeping inflation into account it will generate a negative return.

5. Don’t buy property merely for tax saving or just for rental income. Rental income is taxable. Invest in the house which you are planning to live in after retirement.

6. Moneywise be wise do not invest without thorough investigation and do not take decisions in haste.

7. Invest in Sovereign Gold Bonds which are issued by RBI in six tranches every year and earn interest of 2.5 % every year. With the mismatch in demand and supply, the is likely to soar further and will hit  1.5 lakhs per gram by 2030.

8. Keep your spouse involved in money matters.

9. For investing directly in equity always remember to buy right and sit tight 

10. Buy a medical insurance plan by keeping the pandemic such as covid -19 in mind.

Some Don'ts

1.   Don't buy insurance-plus-investment products. Understand both are totally different from each other. While  AGIF (Army Group Insurance Fund) subscription contributes towards insurance. Depending upon the rank, insurance covers are for around ₹50–75 lakhs. Since there is a provision of family pension, the need for insurance cover is comparatively limited.