Retail investors take calculated risks

The initial public offering (IPO) of Wonderla Holidays, a theme-park company, garnered a huge response of a little more than seven times the amount earmarked for retail investors. It received bids for Rs 494 crore against shares worth Rs 63 crore on offer. This is the first hint in a very long time that the long-moribund retail investor market might be making a slow but steady comeback. In a market turning pricier and more expensive, retail investors are stepping up wherever they hit upon bargain-buying opportunities.

They are also becoming choosy in picking investments. Public issues before Wonderla had not done too well, Loha Ispat being one of them, as their pricing was reminiscent of the frothiness in the IPO market. That might be a good thing, as it suggests retail investors are looking at valuations more closely than before.

A CHANGING MINDSET?

A few retail investors are beginning to seek attractively-priced investment offerings and getting back into the market Watching valuations and entry point is the key. Long-term investors prefer safer investments as compared to short-term investors Retail investors must avoid looking at recouping their losses but rather focus on forward prospects of an investment Retail investors must also avoid chasing an investment as very often that has led to getting in at peaks

Experts say a retail investor is now looking at IPOs, follow-on public offers (FPOs) and debt issues with more circumspection, closely scrutinising the prices. To raise more cash, a company can sell fewer shares at higher prices. But such issues are not finding any takers.

Investors had lost money in almost 80 per cent of the IPOs issued in 2012-13 following which they had become risk averse when investing in the markets, which includes IPOs and equity mutual funds. A few IPOs had to be called off last year.

Wonderla is not the only company that garnered huge retail demand. PowerGrid's FPO from the Government of India saw demand twice as much as on offer in the portion earmarked for retail investors. The CPSE ETF, a divestment programme of select public sector stocks, saw demand 33 per cent higher. The Rs 3,000-crore CPSE issue saw demand worth Rs 4,400 crore, with retail investors putting in Rs 1,000 crore. The offer secured nearly 38,000 retail applicants and many were first-time investors. At a 10 per cent discount to the existing offer price, the ETF did appear a juicy investment.

Incidentally, the CPSE ETF has given 14.5 per cent returns over its offer price. In fact, all the offerings listed so far have made money for retail investors. Power Grid and Engineers India are up, respectively, 16 and 52 per cent over their offer prices. Wherever there has been a discount or stocks offered at good prices, demand from retail investors has been huge.

Says Motilal Oswal, chairman and managing director of Motilal Oswal Securities: "Retail investors are making a selective entry into the market. Their risk appetite has increased and some of the investors who were not active have again started investing, but they are cautious."

Mutual fund schemes, too, are seeing some good retail participation. ICICI Prudential's Value Series have garnered over Rs 1,000 crore.

Retail revival
All this has led to a revival of retail interest, though these are still early days. Experts say two contrasting perspectives are emerging in the market. On the one hand, some investors are exiting from MFs at higher levels. Others are buying selectively into attractively valued public offerings. Says Kunj Bansal, executive director and chief investment officer, Centrum Wealth Management: "There are two contrasting signals coming out from retail investor behaviour. But, clearly, there is some retail investor interest coming back wherever they see value. Whether this trend will be sustained will be seen only after the elections."

Experts also say the retail investor is becoming choosier. In the past, they have badly burnt their fingers, coming into the market at peaks. Inflows into MFs have surged during market peaks and, subsequently, in a cyclically falling market, retail investors lost badly. Hence, over the years, their confidence in this market has been very low.

Market watchers are pleased to see retail investors now taking studied investment decisions. The latter has invested in IPOs wherever the valuations have been lower. Experts say the trend earlier was to offer discounts to retail investors. However, no discounts were offered in the Wonderla IPO; yet ,it garnered a very good subscription. Says Bansal: "With every passing experience, an investor is becoming more discerning and choosing investments well in this market."

Differing perspectives
However, the losses of recent years are still a worrying factor to many retail investors even now, and they're even now trying to recoup losses. MFs are seeing large redemptions from equity schemes as the markets trend higher. Says Debasish Mallick, managing director and chief executive officer, IDBI MF: "Retail investors have for long been sitting on losses; they're now trying to recover that money and, in the first phase, they are exiting. That is what is happening right now. The trend is definitely positive and, if the election results provide the trigger, we should start seeing more inflows."

Experts say there are two kinds of investors, the short-term trader and the medium-term to long-term retail investor. But the long-term investor is still missing. Says Sandesh Kirkire, chief executive officer of Kotak Mutual Fund: "Investors are not moving away from the short-term mentality. Less than two per cent of India owns equity. The mutual fund investor has to stay for long term and that is not being seen. If that happens, financial literacy levels would have improved."

Hence, experts recommend retail investors clearly define their investment horizon and only then enter this market. An investor has to divide a portfolio into two, trading and investing, and set internal benchmarks of performance. If parts of one's portfolio are suffering losses, experts recommend evaluating how much can be recovered and re-balancing one's portfolio accordingly.

What to do
Retail investors should look at long-term investing more seriously, say experts. Says Kirkire: "If you have invested at the worst time in the last 15 years. Every year you still made double digit returns. That's where levels financial literacy should improve. That awareness will need to greater participation in the capital market."

They also say retail investors shouldn't take hurried decisions in this market. If loss avoidance is one's objective, experts recommend sticking to debt investments, as interest rates there are now higher.

New retail investors in this market should be particularly careful about being carried away by a rising market. In general, with equity investing, you need to look for and choose profitable companies at attractive prices. If you invest in a company without doing homework and studying the valuations and demand, you are putting your money at risk. But if you invest in sound companies at lower prices and valuations, you'll end up turning a neat trick in your portfolio.

Besides, a market rise is not a time to recoup losses. Experts say this is a classical mistake, of looking at rising prices from their entry point. Without, however, evaluating whether the stocks fundamentals are changing or business prospects have improved. The more valid argument is to see for what fundamental reason a stock has moved up and then decide on the next course. If valuations have outpriced fundamentals, that should be the sole reason to sell, not price recovery.

On the flip side, retail investors must be looking at buying stocks at attractive bargain prices. If you can't purchase at good valuations, you often end up being the dupe who buys at the top-end of the market. That's what you don't want to see happening again.

anand maurya
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