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BSE IPO Index vis-a-vis Sensex
Oct 7, 2017

The opposite of a perceived ghost house is a real one. Imagine over paying to stay in a haunted house. In the Indian stock market, IPOs are the closest thing there is to a ghost house. And they have special powers to attract gullible investors. Barring a few names that have quality, most IPO companies fail to live up to the hype.

The BSE IPO index has underperformed the Sensex over the past decade. Investors blindly following the IPO hype might have done better following the Sensex. Moreover, when the markets touch new highs, the frequency of new IPOs hitting the market increases. The valuations go through the roof. Promoters and private equity investors take advantage of this frenzy to offload their stake.

Also, reasonably priced issues get oversubscribed multiple times. Investors rarely get shares of such companies. And they end up owning shares of overpriced issues.

What should one do in such a situation?

While it's necessary to be cautious on IPOs, you don't need to completely ignore them either.

For every Reliance Power-like issue, there have been issues like MarutiTCS, and Jubilant Foodworks Ltd (with returns over 4,000%, 1,000% and 500% respectively) that have made investors rich.

The percentage of such issues, unfortunately, is very low (Check this IPO performance snapshot). The odds are stacked against a retail investor.

careful evaluation of each IPO on its merits - its fundamentals, and most importantly, valuations - is the only way to spot future multi-baggers. To learn how to navigate the treacherous world of IPOs, do read our special report on finding money-spinning IPOs.

Data source: BSE

This Chart Of The Day was published in The 5 Minute WrapUp - Invest in a 'Haunted House' Stock and Make a Killing

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