Monday, June 18, 2012
When the word "Small Cap" is mentioned in the investor community, lack of interest and confidence is observed which shows the disillusionment that investors have towards this category.
The aversion towards this category will be more evident in the present context when there is gloom, both at the domestic and global front. The prevailing negative sentiments have made stock market investing a nightmare for all those who have parted with their hard earned savings into this sector, fondly called the barometer of the economy.
However, at this juncture, we would like to differ from the general view and recommend risk taking investors not to follow the herd but rather they can consider taking a small exposure into the small cap stocks.
Small cap stocks offer a lot of potential to generate additional return in your portfolio. Experts and Guru's of stock market should put in extra effort to create more awareness about benefit of investing in small cap stocks during choppy markets. Actually there is a need to calm down the investors during market downturns and advise them on the positives of investing into this category when markets are range bound.
Small Cap stocks are known to deliver impressive performance when bulls rule the markets, but they get battered during a bearish regime. For instance in 2009, Sensex was one of the best performing markets vis-a-vis its peers. This was on account of the positive impact of the stimulus released by the Government and the election results, which led to confidence among investors and corporate India that a stable government at the centre will be able to bring in a lot of reforms. This saw the index posting a superb return of 81% while the BSE Small Cap Index actually delivered an impressive 126% during the same time horizon.
This could be attributed to the fact that during market upturns small cap companies normally outperform their larger peers, since the latter would have already reached their peak in terms of the potential to grow in the future, while the former actually gets to unlock its growth potential as there is a long way for them to reach the maturity stage.
There are a lot of reasons why investors should not directly get into small cap stocks as some of them can be illiquid and concerns may arise about the way the company is being professionally managed. Moreover, these companies have limited media coverage and they are largely unknown among investors, which means the information in public domain will be very limited.
Hence in this scenario, investors who want to invest in small cap stocks should go by advise of professionals who have the expertise to spot these hidden gems. We believe that with BSE Small Cap Index trading at 55% below its all time high, this is the right time to get into small cap stocks. However, this category is recommended only to investors who are ready to take the extra risk to get the additional upside in their portfolio and also have the patience to wait to reap the benefits.
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Small Cap Stocks - A Star in the Making!
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