Home / Markets / Stock Markets /  Should you buy smallcap stocks on dips in this market correction?

Stock market of India has been under sell-off heat after the outbreak of Russia-Ukraine war. In YTD time, both Nifty and Sensex have corrected more than 10 per cent whereas small-cap index has corrected over 16 per cent in 2022. So, positional investors looking for value picks available at discounted price may get lured towards small-cap stocks for higher returns when the market rebounds.

According to stock market experts, if fundamentals of a company are perfect, then its share price may not tumble after a certain limit and hence buying quality stocks at lower levels after such heavy correction gives alpha return for investors. But, they said that there is no thumb rule for investing in a bear hit market.

Stock market investment experts said that risk appetite of the investor is more important than the growth rate expected from a stock. They said that small-cap and mid-cap stocks are more vulnerable than large-cap stock in a bear hit market. So, one should start with large-cap and keep some fund ready for investing in small-cap stocks once the market bottoms out.

Speaking on small-cap and large-cap stock investment, Dhirendra Kumar, CEO at Value Research said, "If we look at the 2008 slowdown hit sell-off, large cap stocks had gone down up to 45 per cent whereas small-cap stocks dipped up to 70 per cent. This means small-cap stock investors will have to face the worst of sell-off when stock market tumbles. So, if the risk appetite of an investor allows to face the worst of the market, only then small-cap stock investment is advisable for such investor."

Relating small-cap stock investment with current market scenario, Sonam Srivastava, Founder at Wright Research — a SEBI Registered Investment Advisor said, "Small-cap stocks have recovered last week much faster than large-cap stocks, but there is no clear sign of a longer-term recovery in the market yet. In this time of rising uncertainty, we recommend being careful when buying small-cap stocks. However, it would be interesting to know that small-cap stocks do better than large-cap stocks in inflationary environments. Still, even in the small-cap bucket, we recommend picking value stocks with solid capital structure and differentiation."

For those who want to take minimal risk while investing in a bear hit market, Arijit Malakar, Head of Research — Retail at Ashika Group said, "Small-cap and mid-cap stocks are more vulnerable in volatile market. The fear of recession in US amid the aggressive rate hike by Federal Reserve to tame the inflation keep the equity market on edge. If there is recession in US as per the expectation then it could be felt in India as well. In stagflation where the demand is low and inflation is high, the small companies find difficult to sustain its business momentum as they have less pricing power compared to large scale companies. Large-cap companies are well placed to weather such economic downturn with their healthy balance sheet, strong brand proposition and better pricing power. Hence, in turbulent market it is better to stay invested in large cap companies having strong fundamentals, good business moat and strong industry tailwind."

Unveiling investment strategy in a bear hit stock market, Avinash Gorakshkar, Head of Research at Profitmart securities said, "Even if your risk appetite is high, you should avoid taking unwanted risk. In a bear hit market, one should start accumulating in large-cap stocks and keep an amount ready for investing once the market stabilizes. By following this strategy, one would be able to gain maximum from one's investment."

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

Asit Manohar
Chief Content Producer at Live Mint Digital Team
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