Small is Profitable Too!

The biggest risk in equity market investment is not the volatility but the risk of wiping out of the capital. The risk of capital erosion is at its maximum when one invests in micro-cap companies – at least that is what the perception is. Shreya Chaware explores the pros and cons of micro-cap investing while also highlighting the performance of the tiny treasures

- Shreya Chaware

When it comes to equity investing, one of the important questions every investor struggles to find an answer to is how much of the total portfolio money should be allocated to smallcaps, mid-caps and large-caps. Often the fine judgement of portfolio allocation across market capitalisation comes with experience and after studying the risk profile of individual investors. For a conservative investor it is recommended that 90 per cent of the portfolio money allocated for equity investments should be parked in large-caps and the remaining 10 per cent in mid-caps and small-caps. If the investor’s risk profile suggests higher risk-taking ability, in that case the allocation can be 50 per cent in small-caps and mid-caps with 50 per cent in large-caps.

For a moderate risk-taker, the recommended portfolio allocation is 70 per cent in large-caps and 30 per cent in small-caps and mid-caps. If one sticks to the above suggested portfolio allocation derived after a thorough risk profiling is done, chances are the experience in the equity market will be good as the portfolio will be aligned to the risk-taking ability of the individual investors. Now, how does one accommodate micro-cap stocks in a portfolio that shows promise? What are micro-cap stocks and should micro-cap stocks be included in the portfolio at all? It is perceived that micro-cap stocks are highly risky and not for conservative investors. However, for those investors with higher risk-taking ability, micro-cap investing is not untouchable.

Micro-Cap Portfolio Building