Investing in IPOs? Here are key risks you should know

According to Pranjal Kamra, CEO of Finology, companies generally come with IPO in a bull market when the market has ample liquidity and the prices are skyrocketing.

"Due to high optimism in the market, most of these IPOs come with an expensive price tag and this is the reason many IPOs underperform the benchmark in the long run,” Kamra believes.

Keshav Lahoti, associate equity analyst at Angel Broking Ltd seconds Kamra’s thoughts.

"Normally, companies launch IPO when the stock market is at a high valuation, so they get good valuation while launching the IPO. It is possible that on a listing day, IPO can list below issue price, so there's a possibility that investors can suffer a heavy loss," he warns.

As per Lahoti, IPO stocks are quite volatile during the initial days of the trading and they don't have any limit when trades need to be frozen on such stocks.

Due to the less information available, Kamra says it becomes very difficult to judge a company. Though the information related to financials is available in the DRHP, this may not be adequate to evaluate the management’s efficiency.

According to Kamra, though some of the IPOs offer good listing gain to investors due to high demand in the market, there is no guarantee of allotment of shares.

The retail quota is generally very less and in the case of oversubscribed IPO chances of allotment are rare. Even if investors get lucky enough to win a lot, Kamra adds, the absolute gain is enough to make a significant financial impact.

"Therefore, the rewards are very minimal to the risk taken while investing in an IPO," he cautions.