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Research before investing in IPOs, funds and insurance policies

Research before investing in IPOs, funds and insurance policies

Before investing in IPOs, new fund offers and insurance policies, make sure that you are familiar with their growth prospects and associated risks.

Financial documents like draft red herring prospectuses and insurance policies run into several pages in small, single-spaced font.

Though going through a thick volume of text can be a daunting task, it cannot be a valid excuse for investing in a public issue, mutual fund or insurance based on a colleague's advice or analyses in newspapers and television channels.

Every investor should go through offer documents and IPO prospectuses before taking an investment call. So what are the things that you must look for in these voluminous documents?


When a company comes up with its initial public offering (IPO) to raise money from the market, there is a flood of information and analysis on the firm and the prospects of the issue. Every stock analyst and business news channel will have its own recommendations. Not all of them will be free from external influence. As research houses analyse stocks from various points of view, retail investors might not be able to focus on what affects them the most.

IPOs fail to attract investors

"An IPO prospectus is an exhaustive guide that provides comprehensive details of the firm's business, history, track record and finances. It may not reflect the true worth of the firm, but it makes the job of an investor relatively easier," says Phani Sekhar, fund manager, Angel Broking.

"Once you get the insurance policy, ensure that the terms mentioned in it are the same as that in the proposal."
S.B. Mathur
Secretary General,
Life Insurance Council
What information should you dig for in an IPO prospectus before making an investment decision?

"The key to reading a prospectus is to pick up important information related to the robustness of the company's business plan, its growth, the quality of management, pending litigation and disputes, potential liabilities which could have adverse impact on the valuation of the company's stock after listing," says Rajnish Rangari, country head, investment banking, Karvy Investor Services.

EXPERT TIP: Invest in stocks with sound fundamentals

One the most important things to consider is the purpose of the issue. If the firm wants to retire debt, how will it impact the firm's margins and revenue? If the money raised through the issue will be used for expansion, will it improve the firm's position on the growth and revenue fronts? "It is also important to see whether the promoters are participating to buy or sell shares through the issue and try to get clarity on their motive," says Rajesh Cheruvu, head of investment strategy, RBS Private Banking, India.

Even when the company plans to utilise the proceeds of the issue for expansion, you need to ask a few questions. "Does the company really need the capital? If the capital is required for expansion, can the industry absorb additional supply if all the players embark on the same path? You may refer to the industry section (of the prospectus) to gain an insight about the sector dynamics," says Sekhar.

All businesses have risks associated with them. Go through the risk factors mentioned in the prospects to have a fair idea about the risks of investing in the company. If some risks do not have detailed explanations, do a quick research about it.

EXPERT TIP: Check grades before investing in IPOs

Financial track record of the company is a good indicator of its health. "Look into the company's income and balance sheet to check how the company has performed in the past few years," says Cheruvu. "If the numbers are lumpy, look for the reasons for abnormal growth or fall in the figures."

You also need to see if the company enjoys some tax incentives. How long is the tax benefit going to continue? An important point to consider is what happens when the incentives are no longer available?

What to keep in mind
To assist retail investors in evaluation of IPOs, the Securities and Exchange Board of India made their grading mandatory from May 2007. IPO grading is done to provide investors an independent assessment of the fundamentals of new public offerings. Rating agencies such as Crisil and CARE grade IPOs on a scale of 1 to 5, where 1 denotes poor fundamentals and 5 strong.

"IPO grading usually pertains to the financial health of the company measured against pre-decided criteria and parameters relevant for an industry. It is a quantitative measure that is not designed to account for qualitative factors such as corporate governance, business model, etc. IPO grading does not factor in the valuations at which the offer is being made," says Sekhar.

IPO grades cannot be the sole basis of investment decision. "Historically, issuances with good ratings have given better returns compared with those with inferior ratings. Investors should look at these ratings to assess the company but should not be taking it as a recommendation," says Cheruvu.


Investors looking for low-risk investment avenues can invest in mutual funds. The return from mutual funds does not depend on the unit price, but the overall fund performance. Low per-unit cost of new fund offers make them look good, but you need to analyse the fund before investing.

Like stock IPOs, new mutual funds also provide offer documents which mention investment objectives, proposed investment strategy and asset allocation and risks associated with the investment, among others. Though the document is lengthy, fund houses provide a snapshot of important aspects for the convenience of investors.

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"As investors are putting their hard-earned money into the scheme, it is important on their part to assimilate its key aspects through different means, including advice from their advisor or contacting the mutual fund house," says Neelesh Surana, head, equities, Mirae Asset Global Investments (India).

"In terms of factors such as lock-in period and exit load of mutual funds, there is a uniformity due to regulatory norms."
Neelesh Surana
Head, Equities,
Mirae Asset Global Investments (India)
Though the objective of the fund is clearly mentioned in the offer document, most of them have clauses which allow certain deviations under specific scenarios. You need to review the investment objectives.

"In terms of other facets such as lock-in period, exit load, fund charges and tax liability on the income, there is a uniformity for two reasons: strong regulatory guidelines and competitive nature of the industry," says Surana.

How to choose the best Mutual Fund

It is important to gauge the implications of these aspects on your investments. "For example, international equity funds with investments of more than 65% in foreign funds are treated like debt funds. Thus, it will have direct implication on the taxation aspect of the investment. You should seek advice on these aspects before investing in such funds," adds Surana.


Having adequate cover for your life and assets is important, but just having an insurance policy does not serve the purpose. You need to have insurance policies which provide you the necessary protection.

"Irrespective of what your agent has advised you, ask for a copy of the product brochure and benefit illustration for cross-checking," says Suresh Agarwal, executive vice-president, Kotak Mahindra Old Mutual Life Insurance.

Check the duration of the insurance cover and payment of premium. Do you need to pay premium for the entire period, for a limited tenure or just once?

When buying a unit-linked insurance plan (Ulip), check the maturity and death benefits and fund descriptions in the plan brochure. You should also go through the benefit illustration which outlines the benefits that will accrue to the policyholder and the policy charges at assumed rate of return of 10% and 6%.

Go through IPO prospectuses, fund offer documents and insurance brochures, and ask the right questions for making wise investment decisions.
When reading the benefit illustration of traditional policies, it is important to note that the policies might not be able to give a return of 10% if these are debt-based instruments. For both type of policies, you need to understand the terms and conditions for revival and surrender. Term policies are easier to analyse as there is no investment function.

Exclusions are one important aspect to check in an insurance policy. Life insurance policies typically have a suicide exclusion, but they can offer additional benefits such as accident or health benefits with certain exclusions and conditions.

Policies also have room for flexibilities and changes such as modifying the sum assured and switching between different Ulips. Make sure that you are comfortable with the lock-in period during which you will have to pay a hefty penalty for exiting the policy.

"Once you get the insurance policy document, ensure that the terms mentioned in it are the same as the proposal offer," says S.B. Mathur, secretary general, Life Insurance Council.

"If you are not satisfied with the policy, you can return it within the free-look period, 15 days from the receipt of the policy document. It is a preventive step to ensure that there is no error or mis-selling of policies," says Mathur. Give the reasons for return of the policy and you will get a refund after some deductions.

If you can spare some time to go through draft red herring prospectuses, fund offer documents and policy brochures, you won't have to face disappointment later. Having bought a right insurance policy will also save your family from having to go through a financial ordeal in case of an eventuality. Invest some time for peace of mind.