Issues like MOIL, where even on an application of 200 thousand, there was only 96% chance of getting 1 lot allotted to the retail investor makes me question the merit of an IPO application.
Traditionally I used a rule of thumb that 1.5k profit on 100k would be the bare minimum that I should be expecting. However yesterday I was trying to recalculate this figure. Here are the workings for 2L application size.
1. Lost Interest @ 8% for half a month. (usually it takes 12 days to get the refund and 18 day for the sales proceeds on the allotment. = INR 666/-
2. Closing of FD. Usually I park my excess funds in a FD scheme and liquidate them to apply for IPO and then after the allotment I have to reapply to a FD at a much lower rate. @1% = INR 2000/-
3. ASBA: If you are applying via ASBA the savings interest @3.5% = 291/- (profit)
So my cost of funds are: 2,375/-.
1. Risk Premium: The biggest risk in IPO market is that if one applies in a bad issue, he/she can expect a substantial allotment and then the IPO would open below the allotment price. However in case of a good issue, even a 2,00,000/- application does not guarantee allotment. As a rule of thumb, people investing in equity market expect a minimum of 15% return on investment (against 8% in FD). Hence the bare minimum risk premium would be 7% for 15 days or about 500/-
2. Management expense: An individual spends usually an hour researching about the issue, calling up friends to know their opinions, TV, newspaper, internet charges etc. Plus times spend in filling up the application and arranging for the funds. 100/- would be a reasonable compensation for this effort. (Please note this is to compensate you for the fact that some time is also spend researching the bad issues)
Total cost: 2,975/-
Please note that my biggest expense is the cost of breaking the Fixed Deposit. This would change from individual to individual
The reason why I am writing this post is that it in retrospect of issues like Punjab Sind etc. I believe that it might be advisable for me to stay out of Tata Steel FPO and other issues