Why Small Cap Equity Mutual Funds are must for wealth creation.

Small cap stocks, i.e. stocks below the top 250 stocks by market capitalization, offer investors exponential growth opportunities. Since these stocks are under-researched and under-owned by the by institutional investors, there is considerable scope of price discovery in this market segment and small cap equity mutual fund schemes managed by good fund managers can generate considerable alpha relative to the broader market.

Small caps are the wealth creators

While large cap and midcap stocks can give good returns to investors in the long term, the multi-bagger stocks, i.e. stocks which multiply investor’s money (gives more than 100% returns), are all mostly from the small cap segment.

In the table below we are showing the number of stocks from different market cap segments which gave more than 100% returns in the last 5 years. You can see that the big wealth multipliers (5X to 10+X returns) are mostly from the small cap segment.

Why small cap stocks / funds have potential to outperform large cap stocks / funds?

Large cap stocks are concentrated in only a few industry sectors. Large cap stocks have limited presence outside Financial Services, Energy, IT, Automobiles and Metals. These 5 sectors account for nearly 85% weight in the Nifty 50 Index. Nifty stocks have virtually no presence in sectors like fertilizers, media and entertainment, services, industrial manufacturing, chemicals, healthcare services, textiles, paper etc. Sectors like chemicals, packaging, sugar and tea, ceramics and sanitary ware, hotels, logistics and construction can be played better through small cap stocks. These sectors are likely beneficiaries of a number of policy reforms enacted by the Government and have a great potential in the consumption driven India growth story.

Why invest in small cap now?

2018 was a very difficult year for small cap stocks. The Nifty Small Cap 100 index fell 30% over the year and many small cap equity mutual funds gave negative returns. It is natural that many investors may feel nervous about investing in small cap.

Small cap stocks are always more volatile than large and midcap stocks. They tend to fall more in market corrections, but they also bounce back stronger from the lows

Though Nifty Small Cap 100 index has recovered nearly 19% from its 52 week low, it is still nearly 30% lower than its all time high (made in January 2018). The examples discussed above shows that 25 – 30% correction in small cap provides a base for a strong recovery. Based on the historical precedence, current small cap prices may provide an excellent investment opportunity for wealth creation in the long term.

Point to Remember.

• Advisable for Long term Goals like Child higher Education, Retirement Planning & Wealth creations.
• Investment through SIP/STP is advisable.
• Strictly for High Risk taker Investor, Conservative Investor stay away with High Volatile Small cap Funds.
• Consult Financial Planner before investing in this space.

Mehul Bheda - 9819592326 | mebheda@gmail.com