Why Build an IPO Portfolio?
Instead of treating each IPO as an isolated bet, building a portfolio approach to IPO investing can improve risk-adjusted returns and provide more consistent results over time.
Portfolio Approach Benefits
Diversification
- Reduces impact of any single IPO failure
- Spreads risk across sectors and time periods
- Smoothens overall returns
Systematic Process
- Clear allocation rules
- Emotional detachment from individual IPOs
- Consistent decision-making
Better Tracking
- Measure overall IPO performance
- Identify what works for you
- Continuous improvement
Allocation Framework
Overall IPO Allocation
Determine what portion of total investments go to IPOs:
- Conservative: 5-10% of portfolio
- Moderate: 10-20% of portfolio
- Aggressive: 20-30% of portfolio
IPOs are higher risk, so limit overall exposure.
Per-IPO Allocation
Limit exposure to each IPO:
- Maximum 20-25% of IPO allocation per IPO
- Prevents concentrated bets
- Allows participation in multiple IPOs
Sector Diversification
Avoid Sector Concentration
- Don't put all IPO capital in one sector
- Tech IPO boom doesn't mean ignore other sectors
- Sector rotation can hurt concentrated portfolios
Suggested Sector Limits
- Maximum 40% in any single sector
- Try to have 3-5 sectors represented
- Include defensive and growth sectors
Strategy Diversification
Mix of Approaches
Balance between:
- Listing Day Exits: Quick profits, capital recycling
- Short-Term Holds: 1-6 months for better returns
- Long-Term Investments: Multi-year compounding
Suggested Split
- 40-50%: Listing day exit strategy
- 30-40%: Short-term holds
- 20-30%: Long-term investments
IPO Selection Criteria
Tiered Selection System
Tier 1: High Conviction (30-40% of IPO capital)
- Strong fundamentals
- Reasonable valuation
- Quality management
- Apply with maximum allocation
- Plan for long-term holding
Tier 2: Moderate Conviction (40-50% of IPO capital)
- Good companies with some concerns
- Fair valuation
- Apply with moderate allocation
- Flexible exit timing
Tier 3: Tactical (10-20% of IPO capital)
- GMP-driven opportunities
- Listing day plays
- Smaller allocations
- Quick exit planned
Risk Management
Position Sizing
- No single IPO should be able to significantly impact overall wealth
- Account for allotment probabilities when planning
- Keep reserve capital for opportunities
Stop Loss Policy
For holdings beyond listing day:
- Set stop loss levels (e.g., 15-20% below purchase)
- Review and exit if thesis breaks
- Don't hold losers indefinitely
Profit Booking Rules
- Book partial profits at predefined levels
- Let winners run with trailing stops
- Rebalance periodically
Capital Management
Reserve Capital
Don't deploy all capital immediately:
- Keep 30-40% as reserve
- Deploy for high-conviction opportunities
- Avoid being fully invested before best IPOs
Recycling Capital
- Exit proceeds fund future applications
- Maintain liquidity for upcoming IPOs
- Compound returns by staying active
Performance Tracking
Metrics to Track
- Overall Return: Total profit/loss from all IPO investments
- Win Rate: Percentage of profitable IPO investments
- Average Gain/Loss: Average profit on winners vs losers
- Allotment Rate: How often you get allotment
- Strategy Performance: Returns by strategy type
Regular Review
- Monthly portfolio review
- Quarterly strategy assessment
- Annual performance analysis
- Compare with benchmarks (Nifty, other IPOs)
Building Gradually
For Beginners
- Start with 2-3 IPOs
- Use single lot applications
- Learn from outcomes
- Gradually increase allocation
For Experienced Investors
- Implement full framework
- Optimize based on historical data
- Adjust strategies based on market cycles
Conclusion
A portfolio approach to IPO investing brings discipline, diversification, and systematic decision-making. Rather than betting big on individual IPOs, spread capital across multiple opportunities with varying strategies. Track performance, learn from outcomes, and continuously refine your approach. Remember, successful IPO investing is a marathon, not a sprint.