Rohit* started equity investing with a long-term approach, but soon moved to the IPO market, tempted by quicker returns. For any IPO, right from the day of subscription closure, it takes only three working days for listing. Rohit realised that this was a golden chance to rotate capital for short-term returns. His belief was strengthened when he saw multiple IPOs generating steep returns on the listing day itself. Lured by short-term return opportunities, he began subscribing to nearly all IPOs.

However, within a few months, he noticed a problem— he was not receiving allotments in the IPOs which fetched big returns on listing day, but was instead getting allotments in those that generated nominal returns or even losses on listing day. He continued holding such stocks in the hope of selling them later at cost price. However, losses in those stocks widened. After six months, he became frustrated to see heavy losses in his IPO portfolio, despite multiple IPOs generating outsized returns in the same period.

Rohit is not alone. In my interactions with retail investors, I have observed the same issue—investors don't receive allotments in profitable IPOs, and the IPOs allotted to them yield nominal profits or listing day losses.

It is always hard to get allotments in quality IPOs because quality companies coming up at fair valuations always tend to get oversubscribed. When institutional investors bid for IPOs through the qualified institutional buyer (QIB) or anchor investor route, allotment chances are higher, as companies often reserve a significant portion of shares (50-75%) for QIBs in an IPO to leverage their large capital, expertise, and market credibility. But that route is meant for institutional investors such as alternate investment funds, mutual funds and banks.

For retail investors, no matter what method they use to apply, the allotment in cases of oversubscribed issues will always be a matter of luck. Hence, one must not be carried away by the hype, but stick to a systematic approach:

Be specific with objectives

If you are targeting short-term returns through listing day gains, then sell on the listing day itself, regardless of profit or loss. The reason is simple: IPOs that list below the issue price often continue to fall. The longer you hold, the greater your disappointment will be.

Always dig deeper

An IPO is typically a means of raising funds for the promoter—either for business growth or for partial exits at times. Thus, it is natural for the promoters to project rosy business prospects during the IPO. It is necessary to read between the lines.

Don't get carried away by listing gains

Despite listing day gains, many IPOs turn out to be wealth destroyers. Across 2024 and in early 2025, multiple IPOs listed 90% above their issue price, but, as of current date, trade 20-30% lower, causing a whopping 60%-70% loss to those investors who have purchased on listing day.

So, don't invest in a stock just by looking at the IPO oversubscription numbers and listing day performance.

Focus on fundamentals

Be it an IPO or a listed company, it is ultimately the fundamentals that drive stock prices over the long run. It is true that many IPOs have destroyed investor’s wealth over a period. But there are also examples of outsized returns.

In January 2025, a pharmaceutical company listed at a 90% premium over its issue price, and it is currently trading around 420% above issue price. The company has good fundamentals with more than 20% return on equity and return on capital employed, good cash flow from operations, lean balance sheet and high growth potential. Investors need to look balance sheet strength, growth prospects, valuation and long-term sustainability of the growth, instead of short-term IPO performance.

Overall, retail investors should not rush into investing in an IPO based solely on the hype in the unlisted market or the grey market premium. If you are looking for short-term listing day opportunity, make sure to close position on the listing day itself irrespective of the profit or loss.

However, for medium- to long-term investment opportunities, investors should look beyond the listing day hype. A company with strong fundamentals and strong long-term growth prospects will provide several entry opportunities once the listing frenzy is over.

Remember, ultimately, long-term value creation is a function of sustainable growth without stressing the balance sheet.

*This is a hypothetical case

Prasenjit Paul is an equity analyst at Paul Asset and the fund manager of 129 Wealth Fund, a SEBI-registered Category III Alternative Investment Fund.

Rohit* started equity investing with a long-term approach, but soon moved to the IPO market, tempted by quicker returns. For any IPO, right from the day of subscription closure, it takes only three working days for listing. Rohit realised that this was a golden chance to rotate capital for short-term returns. His belief was strengthened when he saw multiple IPOs generating steep returns on the listing day itself. Lured by short-term return opportunities, he began subscribing to nearly all IPOs.

However, within a few months, he noticed a problem— he was not receiving allotments in the IPOs which fetched big returns on listing day, but was instead getting allotments in those that generated nominal returns or even losses on listing day. He continued holding such stocks in the hope of selling them later at cost price. However, losses in those stocks widened. After six months, he became frustrated to see heavy losses in his IPO portfolio, despite multiple IPOs generating outsized returns in the same period.

Rohit is not alone. In my interactions with retail investors, I have observed the same issue—investors don't receive allotments in profitable IPOs, and the IPOs allotted to them yield nominal profits or listing day losses.

It is always hard to get allotments in quality IPOs because quality companies coming up at fair valuations always tend to get oversubscribed. When institutional investors bid for IPOs through the qualified institutional buyer (QIB) or anchor investor route, allotment chances are higher, as companies often reserve a significant portion of shares (50-75%) for QIBs in an IPO to leverage their large capital, expertise, and market credibility. But that route is meant for institutional investors such as alternate investment funds, mutual funds and banks.

For retail investors, no matter what method they use to apply, the allotment in cases of oversubscribed issues will always be a matter of luck. Hence, one must not be carried away by the hype, but stick to a systematic approach:

Be specific with objectives

If you are targeting short-term returns through listing day gains, then sell on the listing day itself, regardless of profit or loss. The reason is simple: IPOs that list below the issue price often continue to fall. The longer you hold, the greater your disappointment will be.

Always dig deeper

An IPO is typically a means of raising funds for the promoter—either for business growth or for partial exits at times. Thus, it is natural for the promoters to project rosy business prospects during the IPO. It is necessary to read between the lines.

Don't get carried away by listing gains

Despite listing day gains, many IPOs turn out to be wealth destroyers. Across 2024 and in early 2025, multiple IPOs listed 90% above their issue price, but, as of current date, trade 20-30% lower, causing a whopping 60%-70% loss to those investors who have purchased on listing day.

So, don't invest in a stock just by looking at the IPO oversubscription numbers and listing day performance.

Focus on fundamentals

Be it an IPO or a listed company, it is ultimately the fundamentals that drive stock prices over the long run. It is true that many IPOs have destroyed investor’s wealth over a period. But there are also examples of outsized returns.

In January 2025, a pharmaceutical company listed at a 90% premium over its issue price, and it is currently trading around 420% above issue price. The company has good fundamentals with more than 20% return on equity and return on capital employed, good cash flow from operations, lean balance sheet and high growth potential. Investors need to look balance sheet strength, growth prospects, valuation and long-term sustainability of the growth, instead of short-term IPO performance.

Overall, retail investors should not rush into investing in an IPO based solely on the hype in the unlisted market or the grey market premium. If you are looking for short-term listing day opportunity, make sure to close position on the listing day itself irrespective of the profit or loss.

However, for medium- to long-term investment opportunities, investors should look beyond the listing day hype. A company with strong fundamentals and strong long-term growth prospects will provide several entry opportunities once the listing frenzy is over.

Remember, ultimately, long-term value creation is a function of sustainable growth without stressing the balance sheet.

*This is a hypothetical case

Prasenjit Paul is an equity analyst at Paul Asset and the fund manager of 129 Wealth Fund, a SEBI-registered Category III Alternative Investment Fund.