Home/ Money / Personal Finance/  Small-caps look set for a rebound but note the risks as well

Market uncertainties notwithstanding, Indian investors have pumped in around 11,500 crore into small-cap mutual funds since the start of the year.

This is despite small-cap stocks underperforming larger cap stocks on a year-to-date basis. Data from Value Research show that large-cap and mid-cap funds have on an average delivered 2.43% and 3.23% returns, respectively, since the start of the year, while small-cap funds are down 0.60%.

According to the Securities and Exchange Board of India (Sebi) rules, companies ranked below 250 in terms of market capitalization are small-cap companies. Experts say that many quality companies in this space have witnessed significant correction over the past six months, and are thus attracting a lot of interest from value investors who are looking to invest in quality companies at compelling valuations.

Currently, foreign portfolio investors (FPIs) have sold their stakes in many quality large and mid-cap companies. However, experts believe that the flows are expected to reverse in the future, thereby propelling these companies ahead.

“In the current environment, pharmaceuticals could be an interesting choice for investors. The sector has witnessed a sharp correction and quality stocks in the sector are available at compelling valuations. Another sector that investors can consider is auto," said Aditya Sood, portfolio manager at InCred PMS.

However, the expert warned that investors should not chase mid and small-caps, as two or three-year story.

In terms of challenges, Sood, highlighted, “The interest rate cycle, or rising rates could have an impact on small-caps that are highly leveraged or have big expansion plans in the near future. Select companies could also face headwinds if there is delayed or tepid economic recovery."

Experts say that there is always a higher element of risk involved when investing in mid- and small-caps compared to large-caps. However, these risks can be mitigated to a great extent through long-term investing.

Harshad Chetanwala, a Sebi-registered investment adviser and co-founder of MyWealthGrowth, said, “We believe that small-caps could do well down the line as the markets are expected to put up a good show in the long run. However, investors should understand that the element of risk will continue in this space. In terms of volatility, small-caps could get hurt more, but investors who have the holding capacity can definitely consider investing in small-cap funds, but restrict the allocation to 5-10% depending on their risk appetite and needs."

Abhinav Kaul
Abhinav Kaul writes on cryptocurrencies and mutual funds at Mint. His previous stints include ETMarkets, Reuters Bangalore and Press Trust of India.
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Updated: 08 Sep 2022, 08:28 AM IST
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