Should you invest in SME IPOs?

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In the past 2 years, a total of 163 IPOs have come in the SME sector. Among them, 41 IPOs are trading below their issue price and among those, only one SME IPO has experienced fall of more than 50%. The figures until November 17, 2023, show that one IPO has not yet been listed. One company has shifted to the mainboard and one company has suspended trading. Talking about companies with good returns, there are 65 such companies out of 163 that are providing returns of more than 2 times. And among these 65 companies with good performance, there are 2 companies that have given returns of more than 10 times and that too in less than 2 years.

Now the most important point is that out of a total of 163, 120 companies are trading above their issue price.

In other words, approximately 75% of SME IPOs in the last 2 years are trading above their issue price where investors are making profits. But despite the strong track record of SME companies,

Why is investing in SME companies so risky and why are people afraid to put money into it?

Market expert Santosh Singh believes that besides price action, it is essential to consider fundamentals and liquidity because the minimum investment amount in SME companies is 1.25 lakh rupees.

In these shares, there is a significant issue of demand and supply, hence, market makers are crucial for IPOs of these companies, a role typically fulfilled by investment bankers. This is the reason why there is a considerable amount of manipulation in the shares of these companies. If someone is investing in these companies, when should they exit or sell their shares?

According to Santosh Singh, one should decide when to exit before investing in SME company IPOs because the regulations in this sector are quite limited.

If you get a good listing gain, it is advisable to exit, and if you have good knowledge of the company’s business and want to hold for the long term, keep an eye on its quarterly results.

Looking at the performance of Jay Jalaram Tech and Cool Caps Industries both of these companies have provided returns of up to 1,000-1,200%. The question is how to choose companies in the SME sector because not every company is bad. Some companies are good and become multi-baggers.

Santosh Singh suggests that in drone sector, electronic manufacturing services, cable and wire, and pipe sectors, valuation can be considered meaning, companies with good valuation can be considered for long-term investment. In total, the decision to invest in shares or IPOs of SME companies should not be solely based on the performance of already listed companies.

Besides that, fundamentals, results, and liquidity should also be considered as there is a high risk of manipulation in SME shares.