What To Do With Small Caps?

Small is beautiful but only if one has the right acumen for it. Investors need small-cap funds to energise the portfolio which holds large-cap and mid-cap funds

- NILANJAN DEY

At the outset, I would like to start with an innocuous fact—the number of folios in small-cap funds has accelerated by more than two-and-a-half times over the last couple of years. That number stands at 13 million at this juncture.

And now, a deeper interpretation beyond the apparent innocence of the statement. Small caps have not only generated an enormous interest, they have surpassed their previous records. For the first time, the number of small-cap folios is almost equal to that of large-caps, and in fact, higher than that of mid-caps.

So, how do we interpret this in the current context? What inference, if any, should investors draw from this phenomenon? What strategy must they follow if some of them are over-exposed to the “smallies”? We will find out the answers, and they are bound to reveal a major trend or two.

But, first, a bit about the latest market conditions and the role being played by the mid-and small-cap segments. The second category seems especially vulnerable to market forces.

For the record, the key small-cap indices are all up significantly. The NSE Small Cap 50 Index, for instance, now stands at 5,850 points (mid-September). Its 52-week low and high are 3,984 and 6,047 points, respectively. The NSE Small Cap 100 Index, too, has surged to 12,725 points, its 52-week low and high being 8,682 and 13,079 points, respectively, according to data from the National Stock Exchange (NSE). In sum, this demonstrates the extraordinary potential of this category of stocks.

The major debating point that emerges from the trend is: have common investors stretched themselves too much? Is this over-bought position a cause of concern? To answer these queries, we need to focus on a few important matters.

Allocation Holds The Key