While Indian stock markets are hitting new highs, there is a flurry of Initial Public Offerings (IPOs) in the market. As a retail investor, it’s crucial to have a well-defined strategy if you plan to invest in these IPOs.
In this episode of TOI Wallet, Siddhartha Khemka, Head of Retail Research, Broking & Distribution at Motilal Oswal Financial Services (MOFSL), breaks down the top 4-5 things you should consider before investing in any company’s IPO:
1. **Understand the company’s business model:** Before you invest your hard-earned money, make sure you understand the company’s business model and fundamentals. Warren Buffet’s advice, “Never invest in a business you cannot understand,” holds true. No matter how much hype surrounds the IPO, grasp the company’s core operations.
2. **Research instead of blindly following the company’s name:** Avoid the mistake of investing blindly just because a company has a big brand name. The brand’s reputation doesn’t guarantee big returns. Focus on the company’s financial stability, performance, fundamentals, business model, and plans. Check how the company intends to use the IPO funds; companies looking to expand typically offer better returns than those using funds for debt repayments.
3. **Diversify your portfolio:** If you plan to invest in multiple IPOs, diversify your portfolio by selecting companies from different sectors. Diversification reduces overall portfolio risk and helps balance out market fluctuations. It’s a strategy that minimizes the risk of losses.
4. **Pay attention to the prospectus:** The IPO prospectus is a critical document. Never skip reading it; it’s available on the company’s official website or SEBI’s website. The prospectus contains vital information about the company’s financial performance, reasons for going public, promoter details, dividend policy, risks, regulatory disclosures, and management information.
5. **Focus on valuation and pricing:** Evaluate the company’s valuation and pricing. Understand the worth of the company you’re interested in. Various methods are used to determine a company’s valuation, including business management, capital structure, future earnings prospects, asset market value, IPO stock volume, growth potential, and financial performance. Consider skepticism a positive attribute when investing in IPOs.
In summary, conducting thorough research, understanding the business model, diversifying your portfolio, reading the prospectus, and assessing valuation and pricing are essential steps for retail investors considering IPO investments. Approach IPOs with caution, and prioritize companies with strong fundamentals and sustainable growth prospects.
