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Investing in an IPO? Here are 5 things to keep in mind

The IPO buzz is heating up in the Indian stock market and is surely here to stay. If you are the one looking to invest in IPOs, check this.

The past few months have seen a flurry of IPOs in the Indian stock market. From food delivery brands to digital payments service providers, companies that consumers associate with on a daily basis have gone public, sparking a euphoric response for IPOs.But some of the IPOs like PayTm has disappointed the investors. So investors are advised to be cautious and take informed decisions while investing particularly new issues which have not proved their track record in the markets.

Such is the excitement that there were 11 companies that made their market debut on the bourses in the July-September period, representing an increase of 175 percent as compared to the same quarter the previous year. A massive sum of $9.7 billion was raised through initial share sales in the first 9 months of 2021, making it the highest amount that companies have incurred via IPO proceeds for the 9-month period in two decades.

And while this excitement continues, it is only wise that investors keep in mind certain crucial things before investing in an IPO:

  1. Understanding the DRHP:

The Draft Red Herring Prospectus (DRHP) provides investors with an in-depth look into the company that is coming up with an IPO. The DRHP is a crucial document that contains important details about the company, such as its assets and liabilities, its performance and growth in the past years, and the purpose of the IPO. It provides investors with all the information they require to make an informed investment decision.

  1. The “Why” factor:Before investing in any IPO, investors should analyse the purpose behind that IPO and why capital is being raised. Investors should be cautious and check whether the company is underperforming, or if it has presented record growth and profitability. In case of a flourishing company, the issuance may be an ideal opportunity to invest.
  2. Growth drivers:While investing in an IPO, it is important to take into consideration essential factors like the company’s stature in its industry, its market share, the kind of products and services it offers, its demographics, future expansion plans, crisis management ability and efficiency, etc.
  3. Risk:Investors must pay due attention to the risk factors mentioned by the company in its DRHP. Factors like legal matters or policy-related changes etc. play a crucial role in determining the company’s future growth prospects.
  4. Assess your risk appetite:As it is true for many investments, it is also equally important for an investor to analyse his/her risk-taking capability before investing in an IPO. Assessing one’s own risk appetite is crucial and acts as a filter to determine whether or not a particular IPO is worth the risk it comes with.

The IPO buzz is heating up in the Indian stock market and is surely here to stay. Many renowned companies have gone public, fueling consumers with a lot of interest in these offerings.

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