Initial public offerings (IPOs) are India’s most sought-after investment opportunities. Investors can buy a stake when a private company goes public and lists its shares on the stock exchange. Some of the biggest IPOs, such as that of a leading digital payments company, food delivery unicorn, or recent new-age consumer tech IPO, have given stellar listing gains to investors.
However, the high demand for shares during such big-ticket IPOs makes it difficult for retail investors to get an allotment. How can you ensure you have enough funds to invest in the subsequent big IPO? Systematic Investment Plans or SIPs in equity mutual funds can help you reserve funds for this purpose.
How SIPs Help Investors Fund Big IPOs
Systematic Investment Plans allow you to invest a fixed amount regularly in a mutual fund scheme. By investing every month, you buy more units when the market falls and fewer units when the market rises. This averages out the purchase cost over time.
The key benefits of SIPs for IPO investing are:
1. Forced Discipline and Habit
SIPs enforce a savings and investment habit every month without having to time the markets. Over 3-5 years, even small sums can add up to a corpus for IPOs.
2. Rupee Cost Averaging
By investing every month, irrespective of market levels, SIPs allow you to buy more units at lower costs, reducing your average cost more than lumpsum investing.
3. Power of Compounding
Equity funds invest SIPs into shares and equity-related instruments. The compounded returns on the growing corpus can be 10-15% annually over long periods.
4. Builds Investible Surplus
A SIP that matures after 3-5 years usually grows to a sizable corpus that can be withdrawn just before a big IPO.
How to Plan Your IPO Investments
Here is a step-by-step process to plan your SIP investments for big forthcoming IPOs:
1. Identify Upcoming IPOs and Expected Size
Read business newspapers and market news to keep track of major IPOs in the pipeline. Note down the expected issue size and listing timeframe.
2. Estimate how Much you can Invest
Decide how much you want to invest in the IPO. Recently, oversubscription levels have been 15-20 times so that you may get very few allotted shares. So invest an amount you are comfortable with, even if you get a smaller allotment.
3. Calculate the Monthly SIP Required
Assume you want to invest ₹2 lakhs in an upcoming IPO expected after 3 years. You would need to invest ₹5,500 monthly to reach ₹2 lakhs corpus in 3 years.
Use online SIP calculators to arrive at the required monthly figure.
(Assumed 12% p.a. equity SIP returns)
4. Start Your SIP Investment
Start monthly investing through SIP in a large-cap equity fund or a blue-chip fund. Continue it diligently for three years before the IPO.
5. Stop SIP and Withdraw for IPO
Stop your SIPs a few months before the IPO launch. Withdraw your maturity corpus and park it in a liquid fund. Use this standby cash to apply for the IPO when it opens.
Planning early with SIPs allows you to reserve funds for big forthcoming IPOs, even with a modest monthly investment.
Choosing the Right Equity Fund
Here are some tips for choosing the ideal equity fund for an IPO investment plan:
- Large-cap funds: Invest in the largest blue chip companies and are ideal for a 3-5 year SIP.
- Value funds: Invest in stocks trading below intrinsic value and can give good returns over the medium term.
- Flexi/Multi Cap funds: Invest across market caps and sectors and are best suited for IPO reserves.
What Level of Returns can you Expect?
Here are the indicative returns from equity funds that can potentially grow your SIP corpus:
- Conservative case: Assume 8-10% CAGR returns from your equity SIP over 3-5 years
- Realistic case: Target 12-15% CAGR returns from your IPO investment SIP
- Optimistic case: Well-managed equity funds can deliver 15-18% annualised returns over long periods
So on an initial ₹5,500 monthly SIP, your maturity corpus over 3 years could be:
- ₹1.8 – ₹2 lakhs in the conservative case
- ₹2.3 – ₹2.7 lakhs in the realistic case
- ₹2.7 – ₹3.3 lakhs in the optimistic case
This demonstrates the power of SIPs in building a sizeable investible surplus for IPOs within a reasonable time frame.
Common Concerns When Investing Through SIPs
While SIPs are a smart way to build an investing reserve, some common concerns include:
- Market volatility: Equity funds carry market risk so that short-term declines can worry new investors
- Loss of investing discipline: Investors may stop SIPs midway due to external factors
- Personal financial shocks: Job losses, medical emergencies, etc., can hamper SIP continuity
However, these risks can be managed by sticking over a 3-5 year horizon. Spreading your allocation across 2-3 good funds also reduces over-concentration risk.
What if Your Target IPO Gets Delayed
In case the IPO you were targeting gets pushed back significantly or shelved, here is what you should do:
- Don’t stop your SIPs just yet. Continue for some more time.
- Review your target companies. Check if another major IPO is slated soon and target that instead.
- If no other IPOs of interest arise, withdraw your corpus after 3 years.
- In the meantime, invest the maturity amount in a balanced mutual fund to earn market-linked returns until you find your subsequent key IPO.
So, while IPO delays can disrupt your plans, your SIP should continue to grow your capital through other suitable investments.
When should the SIPs and Withdraw Funds be stopped?
To time your fund withdrawal for the IPO application, here are some tips:
- Wind up SIP: 4 months before anticipated IPO launch, stop further SIPs
- Shift to liquid funds: 2 months before IPO, switch maturity corpus to liquid funds
- Apply for IPO: When the IPO subscription opens, apply using the amount in your liquid fund
This ensures your IPO application money is parked safely in liquid funds instead of an equity fund, which carries market risk just before the IPO.
Conclusion
Planning SIPs with a 3-5-year horizon can help retail investors arrange funds for investing in much-anticipated IPOs. By making your money work hard through the power of compounding, SIPs create a reserved pool of funds for you to target significant upcoming IPO.
Utilise this methodical investment approach to expand your participation in the IPO primary market with limited capital.
