Year 2004 saw a boom in initial public offerings (IPOs); India Inc. raised Rs 13,121.47 crore. That's Rs 2,000 crore more than the Rs 11,101.23 crore raised during the previous seven years (1997-2003). The boom has spilt over to this year; companies have mobilised Rs 3,458.95 through IPOs (till May 24). "The return on IPOs has been phenomenal in the last few years. As a result, many secondary market investors have turned to the primary market," explains Prithvi Haldea, Managing Director, Prime Database, a Delhi-based agency that tracks such offerings.

This is where the twist comes into the tale. Of the 11 companies that hit the market in 2005 (see Not Too Good), four (Jai Prakash Hydro-Power, 3i Infotech, Shringar Cinemas and Allsec Technologies) actually listed at below their issue prices. Some others, like Indoco Remedies, UTV Software Communications and, surprise, Shoppers' Stop, which listed at decent premiums, have not been able to sustain their initial run. Is the boom in IPOs petering out? Haldea remains upbeat. "It will be wrong to say that the IPO market is running out of steam just because a handful of scrips are doing badly," he says.

He may be right, but even a handful of companies doing badly can have a domino effect on investor sentiment. Backing newly listed companies can be a tricky affair even at the best of times. The market can be a very unforgiving place and often punches holes into the valuations of the best of companies-sometimes on the basis of unsubstantiated rumours-so one can never be sure whether a bet on a newly-listed entity will pay off or not.

How do you then guard against being taken for a ride? Here's a quick guide to IPO investing that you may want to check out before reaching out for the next IPO form. It's not foolproof, mind you; so do your research carefully before taking the plunge.

IPO Investment Checklist

Company fundamentals: There's a general thumb rule most experts follow. They watch their step (even more) carefully when they come across an IPO from a company they're not familiar with. Says Jigar Shah, Head of Research, K.R. Choksey Shares & Securities, a Mumbai-based brokerage firm: "Before investing in an IPO, you should spend some time studying the merits of the company and its prospects. You can then decide whether the valuation is justified." For this, you have to look beyond just the actual price. "What appears cheap may not actually be cheap," says Sandeep Shenoy, a strategist with Pioneer Intermediaries, adding: "A lot of people buy stocks because they are priced low (in absolute terms), but they need to put in some effort to check whether it's worth that price or not."

Sectoral analysis: Small companies in sectors that are doing well often come out with ipos to cash in on the general boom in their industry. In such situations, comparing the offer price with stocks of leading companies in that sector helps. For instance, the auto-components sector is doing well now. Bharat Forge, a leader in the sector, has been through two auto recessions and has survived, indeed, thrived. But a new auto-components company with an offer price close to Bharat Forge's current trading price may not have the capacity to sustain itself through a trough.

History of promoter: You can safely buy stocks of a company such as TCS, which is backed by the Tata Group, one of the most respected business houses in India. But if the promoter is not well known, and you're not sure of the company's prospects, then check if he has stakes in other listed companies. If he does, find out how they are performing.

Merchant banker: If a company (or its promoter) is not well known, find out more about the merchant banker that's handling the IPO. If the merchant banker has a track record of managing issues that do well after listing, then it's a plus. But this, by itself, does not make the investment worthwhile. Merchant bankers merely ensure that all the listing and other norms are being adhered to. What happens to the company-and your money-thereafter is an issue between you, the company and its promoter. So, we come back to our first commandment: be careful.

Risk factors: You also need to pay attention to the risk factors mentioned in the Red Herring Prospectus. While it is all right to ignore general risk factors (investment in equity is risky and so on), pay special attention to company-specific risk factors (such as court cases pending against it).

Investing in IPOs can be a high risk-high return game compared to secondary market investments. In the secondary market, you buy stocks from other investors like you and not from an insider (the promoter). If you lack the wherewithal to analyse companies coming out with IPOs, you're better off avoiding them. Just stick to the secondary market.