There is no one-size-fits-all timing for investing in an Initial Public Offering (IPO). Your decision should be guided more by valuation, market sentiment, and timing of the business cycle, rather than hype or market peaks. A golden rule: avoid investing in IPOs during the peak of a bull run, as this is often when valuations are inflated and long-term returns are muted.
What Impacts the Decision to Invest in an IPO?
Several factors influence whether or not an IPO is a good investment opportunity:
Valuation vs. Peers: Is the IPO priced reasonably compared to listed competitors?
Market Timing: Is the overall market stable, bullish, or correcting?
Listing Conditions: Are the conditions at the time of listing favorable for price discovery?
Sector Sentiment: Is the company entering a hot sector or a fatigued one?
For example, many investors who entered tech IPOs during the 2000 dot-com bubble had to wait years just to break even. That makes proper evaluation even more critical.
7 Scenarios When It Makes Sense to Invest in an IPO
1. The Story Matches the Timing
Invest when the IPO aligns with a compelling market narrative. For instance, private sector banks like RBL and Bandhan Bank saw strong demand due to positive investor sentiment and solid fundamentals—while PSU banks struggled despite attractive pricing. Always look for IPOs that are entering the market when their sector is in favor.
2. Supportive Market Conditions
Avoid IPOs during market turbulence. If the broader indices have recently corrected by 10–15%, liquidity shrinks and investor sentiment weakens. A strong market with positive momentum increases your chances of robust listing gains and sustained post-listing performance.
3. Reasonable IPO Valuations
Check whether the IPO is priced fairly compared to its peers. Look at:
P/E ratio
EBITDA multiples
Price-to-book (P/B) ratio
If valuations are excessively rich, chances are the promoters are trying to capitalize on bullish sentiment, leaving little upside for investors.
4. Early Stage of the IPO Cycle
The best time to invest in IPOs is when the IPO cycle is in its early phase. In the initial stages of an IPO wave—like in early 2015—investors enjoyed strong listing gains. As the cycle matures and more companies flood the market, quality tends to drop and gains shrink.
5. IPO Crowding and Liquidity Strain
Avoid IPOs when multiple large issues are hitting the market simultaneously. Crowded IPO windows can lead to liquidity crunches, as investor funds are spread thin. This may result in poor subscription levels and weak listing performance, especially for smaller or lesser-known companies.
6. Strong Past Track Record of IPO Listings
Analyze the historical success of IPO listings in the same sector or market cycle. While listing gains shouldn’t be the only driver, they indicate investor enthusiasm and demand. Avoid IPOs scheduled during volatile or uncertain times, such as major economic events or elections.
7. Portfolio Alignment and Diversification
Use IPOs as a tool to diversify your equity portfolio. If a company fits well within your investment theme—be it growth, value, or sector-based allocation—it might be a good addition. With proper due diligence, IPOs can be high-reward opportunities that complement your long-term equity strategy.
Final Takeaway: Be Selective, Be Strategic
IPO investing can be lucrative—but only if you enter at the right time, with the right mindset, and for the right reasons. Avoid the herd mentality. Instead, focus on:
Business fundamentals
Peer valuations
Market sentiment
Macro conditions
Remember, not every IPO is a winner. But the ones that are—when timed well—can offer multi-bagger returns in the long run.
