While blockbuster initial public offers (IPOs) in 2009 such as Indiabulls Power, NHPC, OIL,

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Pipavav Shipyard and Adani Power haven't given great returns since their listing, smaller issues (less than Rs 150 crore) such as Rishadev Technocable, Thinksoft and EdServ helped investors reap rich gains.

However, an FC Invest analysis of 40 IPOs of the past two years shows in most cases the instant riches delivered by smaller IPOs vanished after some time. Buying such small and buzzing IPO stocks after the initial blitzkrieg may prove disastrous for investors.

The mistake many investors commit is that they go by the short-lived listing performance. In the past two years, 70 per cent of the small IPOs, that is 28 out of 40 small issues, did not list at a discount. What's more surprising is that nearly 40 per cent of them actually listed with over 5 per cent premium, making them look foolproof options to make big money.

At the end of the debut trade, some recent small IPOs such as Thinksoft, listed on October 26, 2009, ended the first day with 31 per cent premium. Within three days of listing, the stock (whose IPO was graded 2 by Icra) had doubled its issue price of Rs 125, leaving market veterans fumbling.

Today, the stock is trading at Rs 324, making many investors take note and consider investment.

However, experts say the initial secondary market performance of an IPO stock could be misleading.

"One should invest in a stock during the IPO period if he is convinced about the issue. Chasing post-listing gains is a speculative activity. Investors should not go after such small IPO stocks as the risk of over-valuation and the subsequent correction is very high.

When a stock falls out of favour is anybody's guess," Alex Mathews, head of research at Geojit BNP Paribas Financial Services, said.

An analysis of 40 small IPOs over the past two years shows very few of them were able to hold on to their gains as time passed by.

While the past two years were volatile for the secondary market, listing gains showed a declining trend at the end of each quarter.

Also, if an IPO doesn't get huge subscriptions and the stock skyrockets post-listing, its amazing performance could be momentary, warn experts. "An unnerving feature of 2009 was that the response to the issues of the year was very subdued," said Prithvi Haldea, chairman and managing director of Delhi-based Prime Database.

If a small IPO stock suddenly starts doing well on listing, there has to be a fundamentally positive change for the stock to go up. If the trigger is absent, that's usually a bubble. How a buzzing small IPO stock can fall in a matter of days is best illustrated by Aishwarya Telecom issue. After its May 2008 IPO, the Rs 35 per share issue went up to Rs 135 in the first month and declined thereafter. In June 2008, it fell nearly 70 per cent from Rs 90 to Rs 30 in just 20 sessions, as the smallcap index lost 17 per cent.

"There is also the issue of speculative trade in case of small IPOs, which gets highlighted and naive investors end up investing on those counters," B Madhuprasad, vice-chairman of Mumbai-based Keynote Corporate Services, said.