SME Stocks Surge: Is Investing in SME IPOs Right for You?

Small and medium enterprises have become an integral part of the Indian economic structure by providing a cost-effective production base and large-scale employment generation. Since SMEs are performing well in the market, their stocks are meant to show promising returns as well. In recent years, there has been a surge in SME stocks that every investor finds attractive. But before you decide to jump on the wagon, you must first evaluate different aspects of SME stocks.

Let’s delve into the factors that have resulted in SME stocks surge to find whether or not to invest.

What are SME Stocks?

Know that SMEs are small and medium enterprises and stocks of these enterprises are called SME stocks. Just like your regular IPOs that companies decide to go public with, SME IPOs are offerings specifically of enterprises under the small and medium enterprises category.

The application and allotment process of SME stocks are similar to that of regular IPOs. You have to fill out an application form for an upcoming SME IPO and wait to get a final allotment. 

SME Stocks Surge: What is the Driving Force?

Studies suggest that in the last decade, the BSE SME IPO has shown a whopping annual gains up to 195%. There is no doubt that Indian SME IPOs have been raging but to enter as an investor it is important that you first understand whether these surges have been due to an actual increase in the SME IPO value or all this is just a hoax.

Here’s a list of driving factors for SME stocks/IPO surge:

• Increasing Investor Interest

Over the years, investors have gained interest in small and medium-scale businesses with a higher potential for returns, as compared to large-cap companies. The increasing interest of investors in SME IPOs has often led to oversubscription and a surge. For instance: the ideaForge Technology Ltd IPO collected bids 106 times more than what was estimated.1

• Simple Listing Process

The Securities and Exchange Board of India has simplified the listing process for SMEs which is one of the biggest reasons that you see n number of SME IPOs in the market. Small and medium enterprises can go public without having to deal with a long list of clearances. 

• Strong Market Sentiments

Small and medium enterprises have pushed the growth of the Indian economy beyond what one imagined. This has created strong and positive market sentiments towards SME IPOs. 

• Potential for Innovative Ideas

Since SMEs operate in innovative and niche categories, this gives investors a front-row seat in these categories with a strong potential for higher returns. 

Investing in SME IPOs

SME stocks and SME IPOs have navigated their way through multiple challenges like limited capital access and breaking into a competitive market like India’s. When investing in SME IPOs or SME stocks, making the right choice often hinges on an investor's ability to separate the resilient performers from the fragile and vulnerable. Additionally, the focus is on choosing an SME that works on good governance, strong finances and resilient brilliant strategies.

Whether or not you should invest in these stocks or IPOs depends on your investment goals and needs. SME stocks and IPOs are promising if you are willing to take risks and expect returns in the long run. 

Over to You

Small and medium enterprise stocks are transforming the investment landscape in India, especially in the last decade. SMEs’ potential to bring down imports and increase exports has pushed the government to take multiple initiatives to fund the growth. Government backing has increased the interest of investors in SME stocks, as well.

If you are planning to invest in SME stocks, you must first evaluate the driving factors behind the surge in these stocks. Remember that investing in SME stocks must align with your investment goals.