IPO: Initial Public Offerings or Instant Profit Opportunities? Finding Balance Between Hype and Thoughtful Investing

The latest headline in the IPO space is: ‘41 companies file for IPO in September, 15 in 1 day’. This is the highest number of filings ever in a single month!

With over 100 IPO filings, strong investor demand and handsome listing gains, FY25 is on its way to become a record-breaking year for IPOs. Given the strong domestic economic momentum and the stock market’s incredible run post the pandemic, investors are looking to participate in the India growth story. This is similar to the 2007 IPO boom which followed robust stock market returns in the preceding few years. But there’s a fine line between optimism and euphoria, and Indian investors seem to have misunderstood Initial Public Offerings to be Instant Profit Opportunities.

As per various media reports, an automobile dealership company trying to raise Rs 12 crores in its IPO, received subscription bids of nearly 400 times at Rs 2700 crores. Similarly, the Rs 1100 crore IPO of a jewelry brand attracted Rs 48000 crores, subscribed nearly 60 times and listed at 73% premium. A leading housing finance company listed on the exchanges at a twofold premium after its IPO received an interest of Rs 3.2 lakh crores compared to the Rs 6560 crores it expected to raise! The Fear Of Missing Out and frenzy in Indian capital markets is evident from these and other recent instances of oversubscription and premium listings. Analysts are saying that the potential for upside for these stocks at these lofty valuations looks limited, and investors should thus pare their expectations for future returns.

This enthusiasm in the IPO segment seems to be an extension of the increased domestic participation in equity markets. Equity as an asset class has seen increased interest post March 2020 with Demat accounts and Equity Mutual fund inflows at record highs. As of August, the total number of Demat accounts with NSDL and CDSL has crossed 17 crores, and inflows into equity funds have remained positive for 42 consecutive months, reports AMFI. This trend conveniently coincides with the stellar returns that this asset class has yielded for investors over that period. The Nifty 500 index has yielded a Total Return of 22.28% CAGR over the 5-year period ending September 2024.

Many first-time and young investors who have seen an almost one-way equity market rally post Covid-19, and no meaningful corrections, are prone to misplaced confidence and thus rude shocks. These investors are susceptible to recency bias and herd mentality. If a particular asset class, in this case equity, has done well in the recent past, investors tend to assume that it will continue to do well and thus increase their investments in that asset class, taking on more risk. They also tend to follow their peers and crowds into or out of investments, in this case IPOs, without considering their fundamentals or suitability to their investment objectives and risk-taking ability. Richly valued Indian equity markets, vulnerable to corrections, are further complicating things.

This is why investors need to separate the real from the hype, correct their lopsided, equity-heavy portfolios and revisit the fundamentals of prudent investing. Asset allocation or the distribution of one’s assets into uncorrelated asset classes like equity, debt and gold is a time-tested investment approach in times of market excesses like we are seeing currently. This approach works because the downcycle in one asset class is offset by the upcycle in the other asset class, minimizing downside risk and optimizing returns.

In the current case of extended equity market valuations, with P/E of Nifty 500 index at 27.87 (as on 30th September 2024), it could be wise to moderate both expectations from equity markets, as well as portfolio equity exposure. With global and domestic monetary policy set to become accommodative soon, portfolio exposure to debt and gold could be augmented which tend to benefit from a lower interest rate environment. A multi-asset approach could thus be the way forward.

Those who wish to outsource their asset allocation decisions to professionals, can consider investing in the Quantum Multi Asset Allocation Fund. This fund invests across asset classes in a dynamic, research-backed way, offering investors the growth of equity, the stability of debt and the diversification of gold. It can help you navigate the expensively valued equity markets by offering a multi-faceted portfolio instead of one overly concentrated in equity and thus overladen with risk. By buying low and selling high in a disciplined and timely manner, the fund takes care of human biases and emotions of greed and fear that investors often fall prey to, thus limiting risk and potentially enhancing returns.

Name of the Scheme	This product is suitable for investors who are seeking*	Riskometer of scheme
Quantum Multi Asset Allocation Fund An Open-Ended Scheme Investing in Equity & Equity Related Instruments, Debt & Money Market Instruments and Gold Related Instruments	• Long term capital appreciation and current income • Investment in a Diversified Portfolio of Equity & Equity Related Instruments, Debt & Money Market Instruments and Gold Related Instruments	Investors understand that their principal will be at High Risk

^*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

Investors may please note that they will be bearing the recurring expenses of this Scheme in addition to the expenses of the underlying Schemes.

Above article is authored by Quantum.

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