Calendar year 2021 is set to witness a plethora of initial public offers (IPOs) as fundraising via public issue route gathers steam. At least 15 companies may come out with their initial public offerings. These include Indian Railway Finance Corporation, Kalyan Jewellers, Suryoday Small Finance Bank, ESAF Small Finance Bank, Indigo Paints, Brookfield India Real Estate Trust, Barbeque Nation Hospitality, Home First Finance Company and Railtel Corporation Of India etc. Here are five things you should know before investing in an IPO.
The grading of an IPO is also an important factor. Typically, higher the grading, better the chances of the IPO being a success. IPO grading is the grade assigned by Sebi-registered credit rating agency or agencies to an initial public offering (IPO). Such a grading is generally assigned on a five-point scale with a higher score indicating stronger fundamentals and vice versa.
But there is no definite formula to this. Companies with excellent grades have had to withdraw their IPOs in the past. While grading is a good indicator, it is not the sole criterion. Look at other factors too.
DRHP – An Investor’s Bible
The Securities and Exchange Board of India (SEBI) mandates every company wanting to go public to file a draft red herring prospectus (DRHP) with them. This document is the best source of financial information about the company. Look at what the current share distribution is. A higher percentage of shares held by institutional investors and banks could be a positive sign, indicating their confidence in the company. You should also find out as much as you can about the management team and their qualifications.
Backing Translates to Guaranteed Results?
It’s very common for investors to base their bets in an IPO based on the esteemed list of promoters, major stockbrokers backing it. However, their reasons could be based on different calculations and this doesn’t translate to guaranteed returns. You should base your decisions only on your research and analysis of the company fundamentals and growth prospects before taking a call.
Stick to the Bottom Line
The decision to go for an IPO must be based on your investment objectives, how much risk you are willing to take, and whether you believe in the growth potential of the business. Before investing in an IPO, your investment goals should be clear. A lot of your decisions can only be judged based on your current investment portfolio.
For example, if you are heavily invested in the small-cap sector, investing in an IPO from a small enterprise may make your portfolio even more lopsided. On the other hand, investing in an IPO launched by a large firm may help bring some balance to your portfolio.
Don’t make decisions based on the publicity and hype surrounding an IPO neither on peer pressure or recommendations. Be skeptical and make informed decisions.
Then, there is the question of your investment horizon. Are you planning to invest in the IPO to make a quick profit on the listing day or do you want to hold the shares for a longer period?
This will alter your IPO strategy. A short-term strategy depends on current market sen-timents whereas a long-term plan will compel you to consider the fundamentals of the company.
Do you understand the business?
As a general rule, avoid investing in a business you don’t understand. This is an important factor. This is because a thorough understanding of a business can help you make better decisions. It is always better to do your homework instead of rely-ing on mere hearsay.
Do you feel you have set your financial goals, made your investment strategy and done your research before you apply for IPO? If your answers are in the affirmative, it means it is a good time to learn how to apply for IPO.
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