Avoid Buying IPOs In Highly Volatile Market Conditions

Rishab Kumar, email

A lot of companies are coming up with initial public offerings (IPOs). What factors should I consider before investing in IPOs?

First, assess the company’s fundamentals, like revenue, profits, business model, and its promoters’ reputation. Understand the purpose of the IPO—growth-focused IPOs are generally preferred over those aimed at promoter exit. Compare the valuation with industry peers using ratios like P-E and P-B to avoid overpriced offerings. The red herring prospectus (RHP) provides detailed information on risks, financials, and the intended use of proceeds. Look for institutional backers or anchor investors, as their involvement often signals confidence in the company. Evaluate the company’s financial health, focus on debt levels, margins, and cash flow. A promoter’s decision to retain a significant stake is usually a positive indicator. Avoid IPOs in highly volatile market conditions, as the risk is higher.

Finally, decide your investment objective—short-term gains or long-term growth—and limit your exposure to 5 per cent of your portfolio. You may also invest in mutual funds that focus on newly-listed companies.

Hina Shah, CFP® Luhem²wealth

Suman Saini, email

I’m a retiree planning to sell my house in Bengaluru for Rs 1 crore and buy a smaller one for about Rs 40 lakh. Should I pay capital gains tax and invest the rest in debt funds or the Senior Citizens’ Savings Scheme (SCSS), or opt for Section 54EC bonds? I have no pension income—only Provident Fund, which I invested in FDs, equity, and debt funds in a 60:15:25 ratio.

In your case, the details regarding the capital gains portion, monthly expenses, and your current withdrawal strategy—crucial in determining the best investment approach—are not provided.

If you wish to save capital gains tax, you can invest up to Rs 50 lakh in Section 54EC bonds, offering 5-5.25 per cent interest with a 5 year lock-in. These are low-risk government bonds with limited returns. The interest is taxable, returns may not outpace inflation, but you will save long-term capital gains (LTCG) tax.

Alternatively, if you decide to pay 20 per cent LTCG tax, you can invest the remaining amount freely. SCSS offers around 8.2 per cent interest, with quarterly payouts, and a maximum investment of Rs 30 lakh per individual. For a regular income stream, you may consider hybrid mutual funds with a systematic withdrawal plan (SWP). Assuming you invest Rs 50 lakh after paying tax, a 6 per cent withdrawal rate could provide around Rs 25,000 per month for 15 or more years. These funds offer potential appreciation in the short term, but has market risks.

Hina Shah, CFP® Luhem²wealth

Anuj Mehra, email

I am 60 years old and retired. I have a medical cover of Rs 10 lakh for myself and my spouse by my employer as part of my retirement benefits. I also have an existing endowment policy and one unit-linked insurance plan (Ulip) of Rs 10 lakh each. Should I continue with my existing insurance plans or buy a term plan for both of us?

At 60 and post-retirement, your insurance needs shift from income replacement to wealth preservation, medical cover, and estate planning. Buying a new term insurance policy isn’t usually necessary, as premiums are high at this stage and you likely don’t have major income to protect. Only consider it if someone is financially dependent on you or you have outstanding liabilities.

For your wife, opt for a term plan only if her income supports someone financially. Continue with existing endowment or Ulip policies if they are affordable and close to maturity. Exit only if a Ulip is underperforming or premiums are burdensome.

Your Rs 10 lakh employer-provided health cover is a strong base, but check if it’s lifelong and review terms like co-payment clauses and exclusions. With medical inflation at 10-14 per cent, treatment costs double every five to seven years, so it’s wise to supplement this with a personal family floater plan or a super top-up of Rs 50 lakh-Rs 1 crore with a Rs 10 lakh deductible. For smoother claims, buy both from the same insurer. For now, focus on medical protection.

Uma S. Chander, CFP® Handholding Financials