All about investing in Small Cap Funds
All about investing in Small Cap Funds
Investing in companies with small market capitalisation can be one of the most difficult and potentially rewarding styles. It's difficult because historically during market downturn small caps are battered the most. However, over a longer term, small caps have the potential to outperform. Smaller businesses are often faced with relatively higher uncertainty in terms of their business and profit growth. Therefore, it is necessary to spot the long-term winners among a host of small cap companies which are available for investment, to be able to benefit from their growth potential.In the last financial year, small caps took a back seat and witnessed some major corrections. Investors who want to build a strong portfolio over the long term, undoubtedly great bargains are available today in the small cap space. However, to make worthwhile returns, it is imperative to invest into quality and with businesses in broader markets which has great leaderships, robust balance sheet, strong brand equity and distribution with reliable management.Why invest in Small cap companies?
Smaller companies which are in a relatively early stage of growth phase, typically offer significantly higher long-term growth potential compared to their established larger counterparts. The most often overlooked, under researched and under owned companies in the stock market lie within this space. Some of these emerging companies comprise of stocks with sound fundamentals and therefore create considerable potential for growth.
Here are a few reasons why small caps offer good investment potential:
Better bets in the revival phase: It has been observed in the past that after sluggish periods, or when equity markets have rallied after elections, small caps have performed better than their counterparts.
Scope of getting bigger: Think of the 'small' software company that became a big name to reckon with globally. What if you had the chance to invest in it when it was a mid-sized company? There are hundreds of small cap companies that have proven their mettle and have the potential to grow at a much faster rate than their larger counterparts.
Small caps have performed better in the long-term: From a long-term perspective, small cap stocks have been known to outperform large cap companies despite underperformance over short terms.
Small caps are under-researched: It is a bitter truth that small cap stocks are under-researched and hence under-owned. As a result, there lies immense opportunity to pick those under-valued stocks and unlock their latent value.
Small caps could offer attractive investment opportunities given their modest prices combined with an improving economy and optimism surrounding reforms by the new government. Adding them to one's investment portfolio could enhance diversification and unlock a hidden treasure in value.
What we look for in a small cap company?
Though smaller companies have the potential to grow at a higher rate, not all smaller companies would grow to become mid or large cap
The key is to identify companies with
- Scalable opportunities
- Competent management / promoters
- Strong corporate governance practices
- Balance sheet strength
- Competitive edge
Stocks of such businesses when bought at appropriate valuation levels could offer upside potential over the medium to long term.
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