Investments can turn your savings into wealth over the long term. But someone who creates wealth has patience and the knowledge of where to invest the money. With multiple options like equities, mutual funds, FDs, RDs, bonds, PPF, etc. available, it can get daunting to choose between them. However, picking one of the above is not going to make it easier. For wealth formation, it is necessary to have a decent portfolio.
A portfolio should be a balanced mix of equity and debt. If you are investing in equity, you can look at IPOs. IPOs stand for initial public offering. This is when a company goes from being private limited to being public. Essentially, it can be traded on the stock exchanges.
IPOs are a good opportunity to generate returns. Most companies that are fundamentally sound and have good, justifiable valuations tend to perform well in them.
Let us look at how one can evaluate IPOs?
1. Stay updated with upcoming IPOs:
It is a good practice to be updated about the upcoming companies in various niches. Often, many of them decide to file or at least begin planning for IPOs. Learning the reasoning behind it and how investors stand to benefit can go a long way in making better decisions.
For private limited companies, you can access their financial statements online through MCA’s (Ministry of Corporate Affairs) portal by paying a fee of ₹100.
2. Read the prospectus:
A prospectus is a document that each IPO-bound company files with the ROC (registrar of companies) and the SEBI. It provides potential investors with information about the company, its current financial statements and some past records, its future plans and vision, and more.
The prospectus helps investors with all the possible information to make a sensible and informed decision.
3. Research the sector:
It is imperative that you consider researching the sectors of IPOs. When read up about the niche, you get an opportunity to understand it better in terms of trends, prominent players, competition, market size and more.
This will help you better shape your decision. Sector research often provides new information that the prospectus may not have covered.
4. Conduct a check on management and promoters:
It is necessary to read about the current management and promoters of companies that have filed for IPOs. Many times, it is the management and the promoters who are looking to exit.
This can be a red flag for potential investors, as it can be seen as dumping the shares of their own company to secure an escape. The other thing to look for is whether they are tied to a lawsuit, whether civil or otherwise, to help with a better understanding of their character.
5. Vision alignment:
Do you align with their vision and mission? If you have similar thoughts about the direction they will be taking, then subscribe to the IPOs of such companies. Otherwise, avoid it.
Other factors for you to check:
– Gray market price
– Subscription rate
– Underwriters
These will help you with the pulse on the quality of the IPOs, public sentiment, and a taste of what the future can look like. In case of queries, always talk to an expert but base your decision on facts.