Imagine you’re deciding on which players to play in your cricket team. You add a pinch of class and experience with Virat Kohli and Rohit Sharma for the top order. Hardik Pandya brings the firepower and hitting abilities in the middle order.
And for emerging talent that you expect will perform well and contribute to the team’s win, you’d probably opt for Deepak Hooda or Ravi Bishnoi, who will manage the lower order. And lo! You have a good, winning team right there.
Constructing your ideal investment portfolio is no different. You need a balance of stable, large-cap companies, well-performing mid-cap companies, and potentially profitable small-cap companies that are high on growth and will emerge as winners in the long run. That’s exactly what a small-cap company is.
SEBI defines a small-cap company as one which has a market capitalisation of less than Rs 5,000 crore. And by extension, small-cap mutual funds invest 65% of their assets in such companies. Mostly, such companies are usually outside the regular purview of a common man since they do not feature in the country’s top 250 companies. Think Justdial, Dhanuka Agritech, INOX Leisure, etc.
The momentum is further bolstered by the aggressive pace of investments made by Foreign Institutional Investors (FII) over the last few months. In August 2022, FIIs pumped in over Rs 51,200 crore in the Indian equity markets.
As Shriram Sharma, Investment Advisor, Elevo by tarrakki puts it, “Due to a probable recession, the FED has been slowing down on interest rate hikes, which has improved investor sentiment. A rise in indices is a reflection of improved sentiments helping to boost confidence. It appears that investors are beginning to emerge from their cautious shells and are ready to take on a bit more risk by investing in small caps, which has resulted in small-cap stocks rallying”.
Small-cap funds are a growth spree, indeed. AMFI data notes that July 2022 saw Rs 1,779.45 crores worth of inflow in small-cap funds, the highest amongst all equity/growth-oriented schemes. Even for the second quarter (April-June) of 2022, small-cap funds stayed resilient, seeing an influx of Rs 5,101 crore.
Positive sentiment for small-cap stocks is also grounded in the consistent returns it has generated over the last few years. A one-year window saw returns worth 8.02%, while over a three-year period, returns from small-cap funds boomeranged to 33.39%, per data from ValueResearch. In fact, over just the last three months, they have generated a return of 10.25%.
But as financial advisor Nema Chhaya Buch says they are not devoid of high risks, “For retail investors, it boils down to their risk appetite and the strategies they adopt. If they are looking to take aggressive positions with high risk, then they should consider small-cap stocks. If the retail investors are value-oriented, then small caps provide fertile ground for future multi-baggers.
Sanjeev Dawar, Founder, dream BIG Financial Services, also cautions investors to adopt high-risk tolerance for investing in small-cap funds, since the downsides can be financially damaging. “Moreover, the retail investors need to be extra careful rather than adopting a recency bias. To isolate the risk of high volatility in small caps, invest via SIPs or STP. A long-term approach and proper diversification within the equity asset class are important”, he signs off.
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