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
