Should First-Time Investors Opt for an LIC IPO?

While the initial public offering (IPO) for life insurance companies (LIC) may have already concluded, some enthusiasts are still debating the merits of investing in it. The phrase “Jindagi Ke Sath Bhi Jindagi Ke Baad Bhi” (Life During Both Days of Life and Afterlife) emphasizes the importance of prudent investment. In my opinion, it is crucial for first-time investors to approach such high-stakes investments judiciously.

Why Should First-Time Investors Consider LIC IPO?

Though the answer to this question is not as straightforward, it is worth considering for those who are just starting their investment journey. However, it is crucial to strike a balanced approach and not over-invest in a single avenue.

Strategic Allocation

First-time investors should allocate no more than 10-15% of their total portfolio to IPOs like the LIC IPO. This percentage should allow them to hold on to the investment if it encounters a downturn. Furthermore, extraordinary returns should not be the sole criterion for investment decisions.

Instead of jumping into the investment fearing a potential market crash (FOMO), investors should conduct thorough risk assessments. If the merits of the investment outweigh the risks, then it may be a good decision to proceed.

Why Should First-Time Investors Avoid LIC IPO?

While it is tempting to participate in the IPO, the vast majority of investors may opt to wait and see the performance of the company for a few months before making a decision. Reasons for caution include:

Government Share Reduction

The government is selling a mere 3.5% of the stake in LIC. This indicates that in the future, the government may reduce its significant stake further, leading to an ample supply of shares on the market. This surplus supply could result in a decrease in the stock price.

Use as a Dumping Ground

Historically, LIC has been used as a dumping ground for underperforming public sector units (PSUs) like IDBI Bank. The periodical dilution of shareholding by the government may impact the company's performance in the long term. Government policies can shift, and these shifts can adversely affect the company's future prospects.

Insufficient Due Diligence

The scrutiny of investments made by LIC on behalf of policyholders has been questioned. For example, when companies like ILFS and DHFL failed, it raises questions about the due diligence conducted by LIC in safeguarding the interests of its policyholders.

Mixed Products Offering

The primary products offered by LIC are not pure insurance but a combination of insurance and investment. These mixed products generate abysmally low returns, often failing to beat inflation. Young investors who are seeking higher returns are increasingly moving towards alternatives such as equity investments or cryptocurrency, which offer higher risk and potentially higher returns.

Private Competition

Private insurance players are catching up with LIC and are more tech-savvy. Their market share within the insurance industry is slowly declining due to this competition. In a landscape where technology is constantly reshaping traditional business models, a government-controlled entity may struggle to keep pace.

Hope for Reform

Despite the challenges, any future disinvestment in LIC hinges on its success. The government may take proactive steps to improve the company's performance and attract more investors. Additionally, the brand recognition of LIC is substantial in India, making it a preferred choice despite the competition from private players.

In conclusion, while first-time investors may be tempted to invest in the LIC IPO, it is essential to conduct a thorough risk assessment and a balanced portfolio strategy. Keeping the above points in mind, you can make a well-informed decision that aligns with your long-term investment goals.