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Why it may make sense to leave IPO investing to your fund manager

There was a time when IPOs were the go-to wealth creation products for retail investors, but in the last decade or so we have seen more of them fail than do well over time.

The Burger King IPO is the talk of the town, it’s rare to see a stock gaining 350% in just four days since listing. There was a time when IPOs were the go-to wealth creation products for retail investors, but in the last decade or so we have seen more of them fail than do well over time. There are two primary reasons for this. Firstly, IPOs tend to get hugely oversubscribed and secondly, the price discovery rarely leaves a lot to be gained in the near term.  

Nevertheless, when you see the type of gains that Burger King India has delivered post listing one is tempted. Here’s the thing, had you applied to this IPO, this 350% gain would still not have been yours.

Oversubscription means you miss out

The retail individual portion of the Burger King IPO was around 68 times oversubscribed. The allotment is done proportionately and on a lottery basis. This has two implications; you may not have received any shares from your application and money simply gets refunded to you or if you do get shares, they will be fewer than what you bid for. When all the money you kept aside isn’t invested, your gains get paired.  

Hence, you can’t rely on an IPO subscription as a sure way to create wealth. 

Had you invested in the Infosys IPO at Rs 95 a share, you would most likely have got all the shares you applied for, given that it was undersubscribed. Today that investment would be worth a few crores. 

Instead of doing the leg work in trying to work out which IPOs will work and which won’t, its best to leave it to a fund manager by investing in a managed fund like an equity mutual fund. 

Pricing matters

Secondly, the price at which the IPO comes is also important. In the recent past, IPO pricing is known to have left very little on the table for subsequent gains. For example, of the 16 main IPOs in 2019, five had a negative return on the day of listing and only 7 managed to deliver returns above 10% on listing day. 

In the case of the recent Burger King India IPO, the pricing seems to have worked in their favour because the listed peers were a lot more richly valued in comparison. However, the experience of the last few years shows that nothing can be taken for granted in IPOs and there may not be more than a 50% chance of decent listing gains. 

Instead of doing the leg work in trying to work out which IPOs will work and which won’t, its best to leave it to a fund manager by investing in a managed fund like an equity mutual fund. 

Not only can a mutual fund scheme bid much larger amounts; as an institutional investor, if they miss out on allotment due to oversubscription, given the consistent cash flow in the scheme, the fund manager is better placed to make a decision to buy soon after listing. Missing out on listing gains may be disappointing enough for individual investors to not venture into buying from the market directly. 

The short-term risks of investing in IPOs have only increased over the years and individual investors are better off relying on their institutional fund managers to decide whether the IPO is worth their while and at what price. 

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