Concurrent market buoyancy has led to a significant rise in startups and the growth of numerous companies ready to follow the IPO route. An exuberant stock market and positive sentiment among investors have formed a perfect environment for private companies to raise funds through initial public offerings (IPOs). Twenty-six offerings have managed to raise Rs 39,811 crore within two quarters of 2021.
High Net Worth Individuals (HNIs) are more interested in the unlisted space expecting premium yields from IPOs. One noticeable example is NSE shares in the unlisted space. It was traded at Rs 1,000 in March 2020 and touched Rs.1900 within ten months. While institutional investors are preferring selling NSE shares at a handsome profit after staying invested for nearly eight years, HNIs are buying for high listing gains.
How Rising HNI Interest in the Unlisted Shares Affects Prices
Transactions in the unlisted market are increasing with rising HNI interest that will push the unlisted share prices up considerably. According to market experts, HNIs rush to the unlisted market as the benchmark indices are at their highs. The unlisted market will continue to attract wealthy investors, and an increase with more big investments is expected.
Thus, unlisted shares can be an excellent way to diversify your investment portfolio profitably with increasing HNI interest. You can strategize your unlisted investments after a thorough research on these “unexplored gems”.
How to invest in the unlisted market?
To invest in the top unlisted stocks, you can invest in start-ups and intermediaries, buy shares from promoters, or invest in PMS and AIF schemes.
- Investing in start-ups and intermediaries
One of the ways to capitalize on the unlisted market is investing in pre-IPO companies. These are currently unlisted companies but plan to get listed in the near term. Some current IPO-bound shares are LIC, MobiKwik and Adani Wilmar. It is easy to invest in a pre-IPO company through a Demat account. An investor needs to choose a trusted intermediary to avoid any counterparty risks in the OTC trades. Another option is a startup that may not be on the radar but can grow multi-fold in the future at a later stage. - Buy stocks directly from promoters
An investment bank, wealth management firm and stockbroker can help you connect with the company’s promoters. They also enable investors to know the fair share price of an unlisted company and negotiate at acceptable terms. Unlisted shares are pure supply and demand based markets, and fair price discovery is explored continually. Such transactions are known as private placements. - Invest in PMS and AIF schemes
Portfolio Management Systems (PMS) are professionally managed investment portfolios. The portfolio manager continuously modifies the constitution of the portfolio with varied weightage based on the market trends to offer maximum returns to investors.
Layered Investment – Strategy to invest in the unlisted market
Layered investment, or fund-of-fund investments, is one of the common strategies for investing in unlisted companies with increased diversification advantages. Here investors allocate funds to fund managers (general partners), and these fund managers allocate the funds to various private equity funds. Thus, it is not a direct investment by general partners; instead, they involve another layer of general partners to make investments on their behalf. This strategy allows investors to quickly add value to their portfolios at reduced risk with diversification.
Points that you must keep in mind while investing into Unlisted Shares:
- Extensive due investigation
Extensive due investigation-based selection is unavoidable. Delve into the Fundamental Analysis of Unlisted Equities:
– Business Model Evaluation
– Analyze the Management Team
– Analyze the board of directors
– Debt on the book.
– Last 5 year growth and future projections
– Analyze demand and supply
– Search Competition in the industry
– Analyze Annual Report
- Company’s Growth Prospect
Investigate the company’s growth prospects and how its operations will support its growth and thus, increase profit.
- Invest surplus funds only.
Since unlisted shares are longer term investments, make sure you invest your surplus funds only that you do not require in the near term.
- Aware of your risk profile.
Since unlisted shares are longer term investments, make sure you invest your surplus funds only that you do not require in the near term.
- Aware of your risk profile.
Equity investments are risk based investments that can go from zero to multi-bagger. Going overboard can increase the risk substantially. Therefore, it is crucial to evaluate your risk profile beforehand and gain exposure towards unlisted shares that complement your existing portfolio.
- Return on investments
There are many undiscovered business models in unlisted companies. They can offer higher returns sometimes followed by higher risk.
- Guidance from Investment Management Firms
Unlisted markets are undiscovered companies offering attractive returns, and with the help of experienced investment management firms like RURASH Financials, you can reduce the risk involved. As mentioned, their financial experts will help you to know fair market pricing and take advantage of undervalued stocks.
You are free to sell their shares even before the IPO offer or during the IPO being the part of offered shares, or you can continue to hold them even as listed shares after completing the IPO process. Returns from such investments, in any way, can be sizable, most probably.
Taxes associated with investing in unlisted companies
Long Term Capital Gain (LTCG)
On the other hand, if the stocks are sold after 24 months of purchasing, it is considered long-term, and capital gains are taxed as long-term capital gains @ 20% with indexation in case of a resident taxpayer and @ 10% without indexation in case of a non-resident person.
Can NRIs invest in unlisted shares?
Like mutual funds, direct equities, debentures and bonds, NRIs can invest in unlisted shares also. The investment can be done from NRE and NRO accounts.
Each investor’s needs vary with different financial goals. An efficient wealth management firm can help you diversify your portfolio and reduce risk with listed and unlisted investments and accomplish your investing goals. One reliable investment advisory firm in the industry is RURASH Financials that serves NRI investors.
RURASH is one of India’s investment management firms, providing financial solutions to augment the client’s wealth and facilitate building a legacy.