Money9 Edit | IPOs: New investors should tread with caution

The powerful recovery that markets witnessed from the pandemic-induced plunge has brought new investors into trading. This has made primary markets lucrative for initial public offerings. In the last fiscal, 32 companies raised 40,000 crore rupees through IPOs. In April 2021 alone, six companies plan to raise 18,000 crore rupees from the market. While IPOs may seem like an opportunity to make a quick buck, the reality is that not all IPOs give humongous returns.

A little data crunching of the 32 companies listed on the bourses last fiscal shows that 31% of these or 10 companies are trading below their issue price. Antony Waste Handling is the worst performer, quoting 40% below its issue price.

This year, companies may raise more than three times the amount raised in FY21. Insurance behemoth Life Insurance Corporation of India (LIC), which is expected to list in FY22, is alone expected to garner between Rs 90,000 crore to Rs 1 lakh crore from the market. Other than LIC, 18 other companies have received SEBI’s approval, and 14 more companies planning to raise Rs 23,000 crore are awaiting approval.

While many can smell money that can be made from these IPOs, new investors should tread with caution.

Fundamentally strong stocks make for sound long-term investing. Track record through market cycles, not IPO greed, should be the mantra.

SEBI mandates the company coming up with an IPO to provide a prospectus. One must carefully read all the details provided in it.

Legendary investor Warren Buffett once said: “Invest in the business you understand”. Hence, investors should know about the company’s promoters and their credibility and consider the growth opportunity in which the company is operating, positioning of the company and competitive landscape.

If you are not getting the shares allotted in the IPO at the offer price, avoid buying on the listing day. Instead, consider a wait-and-watch policy.