India has witnessed increased retail investor participation in recent years, driven by factors such as easier access to markets, technological advancements, and a desire for diversification. Retail investors have shown enthusiasm for IPOs, seeking to capitalise on potential gains during the listing period.
After a market lull, as the IPOs seem set to make a comeback, what can retail investors expect this year? Will they flock to the markets? The previous season of the flow of was driven by robust investor appetite, improved market conditions, and a wave of entrepreneurial enthusiasm. Several high-profile IPOs had attracted substantial investor interest, leading to oversubscription and impressive listing gains.
Do the upcoming IPOs mean potentially good investments for retail investors? As the IPO season unfolds in India, retail investors are faced with crucial decisions that can impact their financial well-being. With heightened market volatility, the fear of missing out (FOMO), and concerns over potential valuation slumps as seen in the previous season, it is essential to examine the landscape carefully.
At the same time, the market now has been witnessing significant fluctuations in recent times, partly due to global economic uncertainties and local factors. Investors must acknowledge the inherent volatility and be prepared for short-term market turbulence.
This is where the market regulator SEBI has been bringing in steady regulatory improvements in improving disclosures and the quality of disclosures for IPOs. But then the regulator cannot solve for investors’ greed or irrational behaviour like FOMO. Also, regulators cannot solve for valuation pricing or investors’ not doing their research.
Fears and finance
FOMO, or the fear of missing out, is a psychological phenomenon that often drives investors to participate in IPOs based on the anticipation of significant initial gains. While certain IPOs have delivered impressive returns, investors should exercise caution and avoid succumbing to the FOMO frenzy without conducting a proper analysis. Blindly following market tips or biased unsolicited advice or unregistered Finfluencers might lead to investment decisions that are disconnected from the underlying fundamentals of the companies going public.
The potential for valuation slumps following the initial euphoria of an IPO is a valid concern for retail investors. In the past year, many stocks have seen their valuations correct significantly after the initial hype, causing losses for those who entered at inflated prices. To mitigate this risk, investors should carefully assess the company's growth prospects, industry dynamics, competitive landscape, and the sustainability of its business model. Additionally, investors should consider the broader market conditions and seek advice from financial experts to make informed decisions. Will this mean retail investors staying away or moving to advise-led investments like MF or AIF?
Beginners’ Luck
IPOs of growth companies could offer retail investors the opportunity to create gains. As these companies go public, retail investors can benefit from their future success and potentially capitalise on the appreciation of their investments. Another important factor in the market's response to IPOs is the sector-specific appeal. Certain sectors, such as technology, e-commerce, and renewable energy, have generated considerable interest among investors due to their growth prospects and alignment with current market trends.
Participating in IPOs allows retail investors to diversify their portfolios and gain exposure to a wide range of sectors, unlocking potential long-term wealth creation. It is essential for retail investors to recognise the potential short-term volatility associated with IPOs. While some IPOs have delivered significant gains, others have experienced price corrections post-listing. The frenzy surrounding certain IPOs can lead to inflated valuations, making it crucial for investors to exercise caution and conduct thorough due diligence before investing.
Solving for worries
Retail investors should consider market timing and investor sentiment before participating in IPOs. A booming IPO market does not guarantee immediate success, as factors such as market conditions, overall sentiment, and economic indicators can impact the performance of newly listed companies. Investors should evaluate the prevailing market sentiment and align their investment decisions accordingly.
Maintaining a well-diversified portfolio is crucial in managing risk. While IPOs offer exciting opportunities, retail investors should not overly concentrate their investments on this asset class alone. Retail investors, especially those lacking expertise in analysing IPOs, may benefit from seeking professional advice. Financial advisors or experts can provide valuable insights, assess the risks and opportunities, and guide investors through the selection process.
The comeback of good-quality IPOs could provide an opportunity for retail investors. The democratisation of IPO participation, access to promising startups and growth companies, potential for listing gains, professional research and analysis, portfolio diversification, and long-term investment potential make the IPO boom a win-win situation for retail investors. Valuations play a critical role in the response to IPOs. Market analysts closely scrutinise the pricing of IPOs to ensure they are justified based on the company's fundamentals, growth prospects, and market conditions. Rational decision-making is crucial to avoid speculative behaviour driven by FOMO.
Also in the investment markets, with the run-up of the gold prices, lower returns on fixed deposits, and realty picking up valuations, Crypto is not in favour of investors, the stock market is an open investment avenue. It could nudge investors into IPOs. With prudence and strategic decision-making, retail investors can leverage the current IPO wave to their advantage and unlock significant value in their investment journeys. Depending on the quality of companies that go for listing, we could see either a Pied Piper syndrome or retail investors who will stay invested for a long.
( Disclaimer: This is not investment advice, and is only commentary on investor behaviour. )
