India has registered a massive rise in the participation of retail investors ever since the digitalization of the capital market. Of the total investors, now maximum people are first-time investors aged 18-35 years. While this is an exciting time for young investors, they also need to be careful and avoid some basic investing mistakes, especially when it comes to IPOs. Indian stock market witnessed an upsurge in IPOs last year. The trend is likely to continue this year. However, another prominent trend to emerge out of several companies going public was the rise in popularity of IPOs among investors. Most of these investors are young.
Therefore, as Public Market Investors, here are a few common mistakes that investors are more likely to make and must avoid:
Not understanding the company’s business model
Most important thing in IPO to understand the company’s business model and at what valuation IPO has been priced, is that IPO is undervalued or overvalued by looking at the fundamentals of the company. One of the world’s most successful investors, Warren Buffet warns against investing in companies with no clear business model. If you are investing in the individual stocks of any company, it is vital to understand the company’s business model and determine its growth in the future. Based on that analysis, invest in it. You can also avoid making this mistake by building a diversified portfolio.
Falling for the company name
Recently, we have seen how the investors went after the IPOs of new age companies like Paytm and Zomato. The frenzy around these IPOs was not because of the popularity of these companies among GenZ and millennials. It is common for investors to put their money in the companies because of an emotional attachment rather than a calculative move. Investors need to differentiate and keep their emotions aside while investing.
Timing the market
Timing the market can be a futile attempt even for experienced investors. Led by human behavior, investors leave the market with a fall in prices. They are cautious to invest in the market at such a time. It takes a long time for investors to gain confidence in the market and they return when the prices recover. Therefore, investors should focus on the long horizon and let the short-term vitality pass.
Failing to diversify
Investors should never put all their money in one investment fund. With the expansion of portfolio arises the need to allocate funds to different asset classes like commodities, property, shares and bonds. As they take the initial steps in their investing career, they should choose a global fund. One of the ways to ensure a diversified portfolio is by following the rule of not including more than 10% in one fund. One more way to achieve diversification is mutual funds. Investors can also spread out their risk by investing in multiple mutual funds with different investment goals.
Do not let emotions take over your decision making
It is the truth of the capital market that fear and greed rule the market. As an investor, you cannot let fear or control decisions. Focus on the bigger picture. Always remember that stock market returns can deviate wildly over a short time frame. In the longer run, the historical returns for large-cap stocks have the potential for an average of 10%. One has to be patient to stay away from irrational decision-making.
Making mistakes is part of the investment journey. However, some mistakes are avoidable and one way to avoid these mistakes is to build an action plan for your investments. You have to be proactive and determine the life cycle of your investments. You have to invest in the IPOs as per your goals. If you don’t feel confident about your decision-making, feel free to undertake more research or reach out to financial advisors. A thoughtful, systematic approach is the way to go in investing in IPOs.