There are many reasons to believe that small caps offer significant potential to add value in one’s portfolio.
Small cap investing is usually associated with high returns and high risks. Very few are able to navigate this part of the stock market and gain consistent success and keep the returns. Let’s begin with why Small Caps? We have over 5000+ stocks trading in the Indian stock exchanges and about 90% of the money is invested only among the top 500+ stocks. There remains a vast universe (95% of the market) of small cap stocks (unknown,under researched & under owned) waiting to be discovered which have the potential to create serious wealth if invested correctly.
At an index level itself, over long periods small caps beat the large cap index. The primary activity involves spotting these companies and staying invested during their growth as they transform from a small cap to medium and eventually a large cap. While investing in small caps, one needs to be aware of the risks because all small caps may not become big or survive the test of time.
There are still many reasons to believe that small caps offer significant potential to add value in one’s portfolio. One can stand a chance to make big gains if you are able to identify the right small cap companies to invest in. Here are the reasons why one must consider investing in small caps:
1. Benefit for Unique Businesses
You can consider investing in small caps for the opportunities that only they offer. The small cap space on the business side has unique and niche businesses. There are many companies offering niche products and services which are only available in the nascent stages of a small cap company.
2. Potential Leader of Tomorrow
Small caps have the potential of becoming market leaders of tomorrow. They offer the client the advantage of investing in funds that have the capacity to develop into medium and large caps. The many bluechip and the large caps that we know of today were not long ago small caps.
3. Widest opportunity of the market
Small caps, as seen from the above context, offer investors the widest range of businesses and sectors, since many small caps are unknown and undiscovered.
4. Value Unlocking
Small caps have the potential to accelerate at a much faster pace. They are agile, they are able to quickly overcome business challenges and make the necessary course correction. In addition to this, they are able to grow faster because they are able to adapt to new market trends. Many of them are available at relatively lower valuations due to their size and lack of institutional participation.
Historically, actively well-managed small cap funds over long periods have been able to conveniently beat the benchmark and also create great amounts of wealth. When investing in small caps, be aware of your risk and rewards of investing in it and ensure that you plan this for a suitable time-frame for a successful outcome.
Small caps offer a compelling reason to stay invested for a long time and watch your investments grow as good-quality and well-run small caps grow into mid or large caps sooner than you can imagine.
Thankfully for investors today, there is no need to go looking for these companies or the daunting task of identifying them. One can choose from an array of small cap funds offered by mutual funds and Portfolio Management Service (PMS) managers. They would have a track record and past performance data and indicative portfolio for an investor to make an informed decision.
(By Santosh Joseph, Founder and Managing partner, Germinate Wealth Solutions)
(Disclaimer: This is the personal view of the author. Readers are advised to consult their financial planner before making any investment)