Why you should avoid an IPO


IPO stands for Initial Public Offer.

It is a process by which a private company becomes a public company, also known as a company going public.

IPO’s are open to purchase by both institutional investors as well as retail investors.

IPO NFO mutual fund


Pros and Cons of IPO’s


The company that raises money via IPO can use the money for:

  1. Repaying debt
  2. Tapping into a wider and diverse base of investors.
  3. Raising Capital for further business growth and expansion.
  4. Allowing older and initial investors to exit by selling their share via IPO’s.


Additional reading: Click Here to read our complete review of Edelweiss Recently Listed IPO Fund 

Cons of IPOs

Reasons for raising money

There are several reasons for raising money and not all reasons are positive for investors.

One possible reason could be to repay debt as opposed to further growth and expansion.

You need to figure out whether the company is raising money because it is available or because it is needed.

This makes a lot of sense when you consider that most IPOs are launched during a bull rally rather than a market fall.

An IPO is not the first time a company raises money, it does so via initial rounds of private investment before the company goes public.

Now it is very much possible that these very private investors would want to use the IPO to exit from their investments, this is a not always the case though but very likely.

This is one of the several reasons why IPOS are so highly priced.


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Insufficient Research

A private company is not as well researched as a public company.

Not many analysts cover a private company.

A public company on the hand needs to be periodically audited and have its results published.

Therefore due to the lack of coverage, not much is known about a private company before it becomes public.

This lack of information works against investors looking to invest in the IPO.

Another worry is we do not know how the company will perform during tough times since there is no history of the same.


Timing of an IPO

The timing of most ipos should make you suspicious.

This is because most, if not all ipos are launched during a bull rally.

As mentioned earlier, you need to analyse whether a company is raising money because it is available or because it is needed.

Investors assume that when the market is on a high, it will stay the same and when the market is struggling, it will continue to struggle.

Neither is true though but companies launching take this opportunity to launch ipos when the market is on the up since it easier to raise money when the market is touching new peaks as opposed to launching when pessimism is in the air.

All of this should make one critically analyse the timing of an ipo.


Additional reading: Click Here to read about mutual fund mistakes you should avoid making 


Value of a stock and price of a stock is not the same thing.

Price is what you pay, value is what you get.

IPO’s have historically been exorbitantly priced, more so when they are launched during a bull phase.

When you try to understand a stock better, you undertake research on various fronts from the history, management, finances of the company to the overall sector the company is a part of.

But what happens when the company is part of a niche sector, how do you compare the performance of the company to others?



Listing Gains

The lure of listing gains is the most common if not the only reason why most invest in IPO’s.

There is no guarantee that you will receive any listing gains though since there is no surety that an IPO will open at a price higher than the allotment price.

If it does not list at a price than the allotment price then you do not make any listing gains.

In such a scenario you either sell at a loss or hold on till you make any profit.

Many investors that applied for an IPO with the sole purpose of making a listing profit but do not, end up converting this short term gamble into a ‘long term holding’.

This long term holding based on no research and compulsion makes for a very grim reading.


NFO meaning

A nfo or a new fund offer is a method by which a mutual fund scheme raises the initial investment into the fund.

The new fund offer is available for purchase for a limited number of days only.

After which it becomes unavailable for fresh purchase or redemption for a couple of days.

Once this time duration is complete, the nfo no more remains a nfo and is treated like any other open ended mutual fund scheme.

In which you can invest and redeem as and when you please, considering it is an open ended fund and you comply with the necessary exit load calculations.


Should you invest in a nfo?

You can consider it if:

The new fund offer is a category of fund that is not existent in your mutual fund portfolio.

If it is going to be a part of your satellite portfolio.

If it adds a unique touch to your mutual fund portfolio.

If you understand the functioning, objectives and risks attached with the new fund offer.

The nfo mutual fund is aligned with your risk profile.


You should avoid it if:

The new fund offer is not going to add anything of unique significance to your mutual fund portfolio.

If the nfo is going to be a part of your core portfolio.

If the only reason you are investing is due to FOMO (Fear of missing out).

If you do not understand the investment style and risks attached with the nfo.

The nfo mutual fund is not aligned with your risk profile.



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Summary of why IPOs are not always a good idea:

This is not the 90s anymore when research was scarce, mutual funds were still at a nascent stage and the stock market was seen as a gambler’s den.

Things are far more formalized and regulated although there is always room for improvement.

With IPOs not enough information is available on the company about to be listed to undertake research or undertake any form any sort of opinion, although past returns and performances are no surety for the future but they do help understand how a company does overall specially when things are not looking so good.

IPOs these days are outrageously valued even though there are not enough credible numbers to back them.

Be it mutual funds or direct equity, a strong sense of conviction is needed since you invest for the long term ideally but the same is not visible with IPOs since neither credible numbers are present nor enough resources on the management is available.

Investments should be simple and anything beyond that should provide you with strong enough reasons in terms of quality as well as quantity and past results and future prospects to gain your attention.


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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
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