Investing in Initial Public Offerings (IPOs) can be an exciting opportunity to enter a company at an early stage and earn strong returns. However, not every IPO adds value to your portfolio. A poor decision can lead to locked-in capital, sub-par performance, or losses that take years to recover from. The risks are real, and decisions based on hype or limited information often prove costly.
To minimise risks and maximise IPO returns, look at some useful tips.
Always read the prospectus
The Red Herring Prospectus (RHP) is a mandatory document filed with the Securities and Exchange Board of India (SEBI) before a company launches its IPO. Simply log into your broker’s app where your demat account is held, and head to the IPO section to download the RHP for the IPO you are interested in. This document usually outlines:
- Business overview and company history
- Industry outlook and market potential
- Financial statements and audit reports
- Promoter background and shareholding pattern
- Risks involved in the business
- Valuation metrics like price-earnings ratio, earnings yield, return on equity ratio, debt-equity ratio, price-to-book ratio, and current ratio
- How the IPO proceeds will be used
An RHP gives investors a detailed view of the company’s operations and financial position. Assessing this critical document helps you evaluate whether an IPO is worth investing in.
Understand the purpose of the IPO
A company raises funds through an IPO for various reasons, such as:
- Business expansion and growth
- Paying off existing debts
- Funding research and development
- Meeting working capital requirements
Analyse why the company is going public. Not every reason behind an IPO works in your favour as an investor. If the major goal of the IPO is to repay debt, that’s not a great sign. If promoters are selling a large portion of their shares, it could signal a lack of confidence in the company’s long-term potential. IPOs launched for growth or expansion usually indicate stronger long-term value for investors.
Study the market conditions
Not all IPOs succeed purely on company fundamentals. Market sentiment plays a critical role in how an IPO performs after it gets listed. When the broader market is volatile or undergoing a correction, even strong companies may list below expectations. On the other hand, a bull market could lift average IPOs through strong momentum.
Before you apply for an IPO, check out interest rates, inflation data, and Foreign Institutional Investor (FII) activity. These factors affect liquidity and investor sentiment. It is wiser to wait during uncertain conditions rather than rush into an IPO driven by hype. Timing your entry based on the broader market sentiment can greatly influence your returns.
Think long term
It could be tempting to book profits on listing day, especially when an IPO lists at a premium. But some IPOs reveal their true value over time. If you find a business with strong fundamentals, capable leadership, and a clear growth path, it may be worth holding on to beyond the listing day to strengthen your portfolio over time. Long-term investors often benefit from compounding returns as the company matures.
Use a reliable demat app to explore every aspect of an IPO, from the RHP and company financials to subscription data and peer comparisons. These details help you decide whether the IPO is worth holding on to, not just for a quick gain but as a long-term wealth builder.
Closing note
Maximising returns from IPOs is all about preparation. From reading the crucial documents and understanding why the company is going public to analysing market conditions and deciding whether to hold for the long term, each action shapes your outcome. These strategies not only help you prevent avoidable risks but also put you in a stronger position to find IPOs that align with your financial goals and return expectations.
To make the IPO process easier and more effective, consider MO Riise. Backed by Motilal Oswal, a SEBI-registered public entity, the app is trusted by more than 40 lakh investors. It brings everything together, like access to live, upcoming, closed, and listed IPOs, one-tap downloads of RHPs and research reports, and the ability to pre-apply early. You also get peer comparisons, real-time subscription data, a detailed FAQ section, and 24/7 support, all in one reliable app.
Begin your IPO journey with MO Riise today!
