As a retail investor, your ability to hold on to your investment hurts. If you do not buy and hold equity assets for a long time, you cannot benefit from the growth of the businesses you invest in. In the case of mutual funds, the average holding period in a scheme is around three years. While that is a worrying trend, another one was highlighted in detail in a survey by the Securities and Exchange Board of India. It further shows the fickle nature of your investments.
The survey published last week on initial public offerings showed that about 54% of the value of the IPO was sold in the first week of listing. High-net-worth individuals were at the forefront. They sold two-thirds of the shares within a week. Shares of companies that jump sharply witness the most ‘IPO flipping’ according to the study. About 40% of the retail investors are from Gujarat. That is significantly more than 13.5% of investors in Maharashtra, the second state in IPO flipping.
IPO flipping is a method of using the company’s listing to buy and sell shares rapidly.
The short-term thinking meant that close to 68% of retail investors sold shares when the average bump in the share price on listing was 20%. As many as 28% of the retail investors sold shares when returns were negative. These could be individuals who borrowed money to invest in the IPO. It is hard to imagine actively selling at a loss. Mutual Funds, which have a higher holding capacity, were found to be net buyers during the first week of listing in the study.
This column has always warned against short-term investing in equity assets. In a bull market, everything seems like high returns and low-risk investment. However, there are no free lunches. Financial markets move in cycles that go up or down. Corporate profits determine the overall direction of equity markets in the long term. Share prices steadily increase if companies consistently make profits despite short-term selloff trends. However, if share prices rally aggressively and profits do not keep up with expectations, there is always a good chance of shares falling.
For IPOs, companies go for a public offering for several reasons. In a bull market, you believe you can strike a deal for a company that offers a relatively discounted price to the market in the public offer. However, the sellers have a different purpose. Many companies have raised money through private equity investors, anchor investors, founders or business groups.
Whenever a company makes an offer for sale, it is usually a secondary sale of shares where no money goes into the company. It goes to selling shareholders. There is no new issue of shares. Such a company is usually a profit-making company or has significant growth prospects. Zomato, the food delivery company, is an example. The company continues to see a significant churn in investors. Institutional investors control a majority of that company. A high-free float allows more investors to participate in the company’s future. While Zomato has turned profitable, it continues to grow revenue every quarter. Investors who came into the company after the IPO and continue to hold have witnessed their investment jump several times.
Investing in a large, growing business is not a problem. However, Sebi recently warned about small and medium enterprises’ IPOs. Companies are receiving bids that are way too many than expected. In a bull market, you are probably looking for value in the private market or the new issue market. However, the pricing for IPOs is based on a mechanism that considers recent market trends in similar businesses. The company seeking to list shares is usually offered at a discounted rate to the average valuation in the industry. However, it is your job to understand the risks before investing.
You need to get up to speed with the company fundamentals, like trading in derivatives or other short-term assets. Without knowledge and adequate reading, you cannot apply for shares in an IPO. You should not do that even if your best friend is investing. Discussing the prospects for any investment with an expert is a good idea. That person should be an independent financial advisor.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)