IPO investing requires a clear strategy: use GMP and subscription data for listing gains, or focus on fundamentals and valuations for long-term wealth creation. Discipline and purpose separate profits from losses.

India’s IPO market has been one of the most active in the world over the past two years. In 2024, companies raised Rs 1.7 lakh crore through public offerings. In 2025, there were over 100 mainboard listings, with fundraising expected to breach the Rs 2 lakh crore mark. The volumes are exciting, but the returns tell a more complicated story. While 65% of IPOs gave gains in 2025, only 41% stayed above their listing price over the following months. That gap between listing day euphoria and long-term performance is the central challenge every IPO investor needs to navigate.

So what is the right way to approach IPOs? The answer depends almost entirely on what you are trying to achieve – a quick listing gain, or long-term wealth creation. Each requires a very different strategy.

First of all, an IPO is not a sure bet for profits. It’s an offer to join a company as a part owner for a price agreed upon by the company and its bankers who are in a position to charge as much as the market will tolerate. In 2024, many IPOs were priced at higher valuations, especially in the SME segment, due to the bull market sentiment, which resulted in excessive subscription responses for promoters, thus providing them with pricing leverage.

The first filter is business clarity. It should be apparent in one line how the company makes money and what drives demand. Next, revenue visibility is important: revenue streams that are somewhat predictable, usually via contracts, repeat usage, or sticky distribution are better than lumpy and unpredictable revenue streams. The basic checklist is completed with management quality and consistency of disclosures.

A lot of retail investors apply for IPOs to sell at the time of listing. This is a valid approach, but it is best done in a disciplined manner with signals.

The Grey Market Premium (GMP) is the most commonly used unofficial gauge of expected listing performance. GMP is the price at which the shares of IPO stocks are trading in the unofficial grey market prior to their listing, it’s a snapshot of investor demand in real time. In the past, GMP has been a helpful but not foolproof indicator, with a positive result predicting the direction of the listing approximately 70-75% of the time.

If you take GMP as a subscription indicator, it’s more about consistency than magnitude. A GMP that doesn’t change, or even improves over the course of the subscription is better than a one-day rise. Historically, IPOs that have a GMP of 20% or more have tended to list in the green, even if the listing price is different from the grey market price estimate.

The other key input is the subscription data. Oversubscription is generally a good sign that well-informed institutional investors have examined the offering and have been impressed. To make it difficult for high-frequency traders to manipulate the opening price at the last moment, SEBI has tightened the pre-open session on listing day, where the price is determined before trading commences.

A note of caution: a 40% pop on day one does not necessarily mean a long-term gain for long-term investors. It can frequently be a sign that early flippers, rather than patient investors, took the gains. The exit decision should be made prior to the listing day, not after, when applying for listing gains.

An IPO stock is only worth considering for long term investors if the company has a new business model that they don’t already have listed, which would provide a genuine diversification in the portfolio, or if the company has a good track record, excellent growth potential and a good profitability to reward the new investor over time.

Long-term performance of IPO stocks is not determined by the number of subscribers or by the performance of the stocks on the listing day. The IPO may be very much oversubscribed, and may even trade at a 50% premium, but if the underlying business is not growing in line with that premium, it can be a poor long-term investment. On the other hand, if a business is doing well, but the IPO is modestly subscribed, it can generate excellent returns over a 3-5 year period.

Current LTCG tax laws for listed equity shares provide for taxing IPO shares at 12.5% on the amount of money gained over Rs 1.25 lakh in a financial year if they are held for over a year. This is a valuable benefit over the short-term capital gains tax rate of 20% with shorter holding periods.

The most overlooked part of IPO investing is the valuation. Buying IPOs when things are great and valuations are elevated can be dangerous. Firms make their public offerings at the right time – they want to be listed during bull markets, during a sector boom and when investors are hungry, as these are the time periods when they can price aggressively.

The most practical is to compare the IPO valuation to listed peers. If a company is looking for a P/E ratio much higher than its closest competitor listed on the exchange without a specific reason, such as growth or margins or governance, then the premium is likely to narrow after the listing. That is what many retail investors who bought in on the momentum in 2025 had in their portfolios.

Customer concentration is another risk that is not recognized. When a company’s revenues are generated by a small number of customers, growth may appear steady and foreseeable in the DRHP until it isn’t. It can take years of seeming stability to be lost with one contract.

IPOs are a small position asset class, and should be treated as such. As a rule of thumb, the total exposure to an IPO should be limited to 5% of the portfolio value and no more than 1-2% from any single IPO. That ceiling is to keep investors from the deal that goes down 50% after the lockup. Diversifying the core portfolio should be done before investing in IPOs, if one has not done so already.

The key to successful IPO investing in 2026 is discipline and patience. The quality of the IPOs will be good and the overvalued IPOs will underperform. The new rules of SEBI have made things clearer and have curtailed some risks for retail investors, such as the new rules for pre-open sessions, stricter pricing controls, and better disclosures. However, no regulation can remove the basic problem: how to tell the difference between a good business and a well-marketed one.