Investors often turn to IPOs (Initial Public Offerings) for a chance to earn quick returns. The appeal is simple: apply for an IPO, get an allotment, and sell on listing day for a profit. It sounds easy—but is it really?
While many investors have made money from IPOs, there are risks you need to be aware of. Historically, IPOs launched in the early phase of a bullish IPO cycle tend to perform better. However, as market enthusiasm builds, companies often price their issues aggressively—especially when valuations are already stretched. This can lead to weaker post-listing performance. For instance, IPOs in 2018 underperformed compared to those launched in 2015–2016, when listing gains were more common.
5 Strong Reasons to Invest in an IPO
1. Higher Probability of Allotment in Retail Category
Retail investors typically enjoy a better chance of allotment. The IPO allocation system is designed to distribute ownership among a wider base of retail participants, increasing the odds of receiving shares—especially in moderately subscribed issues.
2. Retail Investor Discounts
Many IPOs, especially from public sector undertakings (PSUs), offer a discount to retail applicants—typically ranging from 5–10%. This feature gives small investors a built-in price advantage over institutional buyers, making IPO participation more attractive.
3. Long-Term Wealth Creation Potential
When you invest in a fundamentally strong IPO and stay invested, the returns can be significant. While listing gains are one way to benefit, the real value often comes from holding quality stocks over time. A classic example is Infosys—an IPO investor in 1995 would have seen exponential gains by staying invested.
4. Supporting Productive Capital Deployment
Unlike secondary market transactions—where money changes hands between investors—IPO investments directly support the company’s growth. You are helping entrepreneurs raise capital for expansion, infrastructure, or innovation, contributing to the economy in a meaningful way.
5. Regulatory Scrutiny Brings Initial Quality Control
IPO-bound companies undergo rigorous due diligence, regulatory checks, and disclosures before going public. This vetting process offers a level of initial safety that new investors might not find in the broader secondary market, which hosts hundreds of lesser-known and less transparent firms.
Reasons to Think Twice Before Investing in an IPO
While IPOs can offer significant upsides, they are not suitable for every investor—or every situation. Here are key reasons to approach them cautiously:
1. Avoid Get-Rich-Quick Expectations
Many retail investors enter IPOs hoping for instant profits. While this occasionally happens, it’s not guaranteed. Treat IPOs like any other equity investment: be patient, have realistic expectations, and allow time for your investment to mature.
2. Don’t Judge by Issue Price Alone
A low-priced IPO doesn’t automatically make it a bargain. An Rs. 40 share can be overvalued, while an Rs. 200 share might offer much more value based on the company’s growth outlook. Focus on fundamentals, not just the sticker price—just like how a mutual fund NFO priced at Rs. 10 doesn’t guarantee better returns than a well-performing existing fund.
3. Research Before You Invest
Not all IPOs are worth your capital. Don’t invest just because an issue is trending. Read the red herring prospectus, analyze the company’s financials, talk to your financial advisor, and understand the business model. A selective, informed approach increases your chances of success in IPO investing.
