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Wednesday, July 20, 2011

Is Smaller Better? - Investing in Micro Caps

When it comes to stock investing, sometimes it pays to think small. Over the long term, investors have been rewarded for allocating a small portion of their portfolio to micro-cap stocks—companies with a market capitalization of less than about Rs. 100 crores.

These smaller companies may not be as recognizable to the average investor, but they pack a major punch. Generally, small companies lead when the economy begins to recover, then the rally transitions to large-cap stocks.

Higher returns, of course, come with more risk. The tradeoff is, yes, you get long-term outperformance but the volatility of returns is greater. That's the price you pay if you want exposure to a better-performing asset class.

Small- and micro-cap stocks make up the riskiest slice of the Indian stock market. Little is known about many of the companies, but that can be an advantage for investors. Over time, small companies can grow much more than larger, more established companies. And while a big company may have dozens of analysts tracking it, a micro-cap stock may be covered by just one or two analysts. Lots of them are brand-new companies or turnaround companies which leaves room for experienced managers to do their own research to find undiscovered companies.

It's never wise to try to time the markets, we recommend keeping a small allocation to small stocks regardless of the market environment, depending on your risk tolerance and time horizon.

As investing in micro and small cap stocks involves high risks, its always suggested to understand company's business, scope of scalibility and growth potential it offers. This can be achieved by doing indepth and unbiased research on such companies before investing your hard earned money on risky assets.

Below is the past performance of companies on which Saral Gyan initiated coverage and recommended as Hidden Gems stocks during last eight months.

Its clearly visible that Saral Gyan Hidden Gems clearly outperforms small cap index since Sept 2010 by whopping 31% as on date.

We also recommended partial profit booking in stocks like Sri Adhikari Brothers, Tide Water Oil, and our recent Hidden Gem - March recommendation to our Hidden Gems subscribers. All of them gave returns of more than 80% in short span of 3 - 6 months.

Do remember that wealth can be created by holding good companies for a period of 3 to 7 years but when stock price appreciates rapidly, its always wise to book partial profits. Later, the same stock will give you the opportunity to buy it back at lower price. This helps you to bring your purchase price down and increase your capital.

Start investing a small portion of your savings in micro / small cap stocks.

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