Which cap to wear?

Introduction: Every day investors are coming across the words of Small Cap, Mid Cap and Large Cap. Today through this article, I will try to throw a small torch on these words. The differentiation is made on the basis of the market capitalization of the companies. Market capitalization is nothing but the market value of total shares of the company. In a mathematical way we can say Number of shares held by company multiplied by the share price. One should note that it reflects only the equity value of the company.

Market capitalization = share price x No. of shares outstanding

When comprehending how to allocate funds for investing in equities, it is important to make a proper trade between risk and return. Portfolio mapping is very vital and crucial in tapping the fruits from the market. The designing of the portfolio depends upon the extent to which we understand regarding the market capitalization. Thus, having knowledge on various market caps is essential for each and every investor.

Small Cap: Generally, a company having a market capitalization below Rs.5,000 crores is treated as a small-cap.

Mid Cap: A company having a market capitalization between Rs.5,000 to Rs.20,000 crores is segregated as a mid-cap.

Large Cap: A company having market capitalization more than Rs.20,000 crores is squared as a large-cap.

Features Small Cap Mid Cap Large Cap
Revenue Low Medium High
Risk of return High Medium Low
Information Not readily available Readily available Readily available
Market base Weak Moderate Strong
Companies Startups and small companies Mid-sized Large and well established companies
Investor Research and analysis Required to much extent Available in the market Available in the market
Return High Medium Low
Short-term Market High returns Medium returns Low Returns
Long-term Market High returns with high risk Medium returns with low risk Normal returns with safe

Now that you are aware of the difference between the large, mid and small-cap stocks, now the question arises here what should be your next step as an investor? Well, there is no need to get confused here as taking into the consideration the following points; you can easily invest in the stock market. 

Where to invest?
Analyze your short and long-term goals. Before investing, one should figure out the financial goals that are to be achieved with a time frame. It might be retirement life, house construction, foreign trip or any of such kind. Without goals, any money you earn can easily be spent instead of being saved or earmarked for an important milestone or goal. As well as identifying financial goals, estimate the amount of money you’ll need to accumulate to reach each goal. Prioritize each goal. Figure out how many years it will take you to achieve each goal. Accordingly select the cap arena.

Analyze the three caps: All these three types of stocks have the best potential for providing returns if invested for long-term but make sure you do your homework well. Keep in regular touch with expert opinions and check the route of fund managers, if you are a beginner. Regularly analyze and shuffle your investment as per the market conditions.

Formulate an investment plan and review it regularly. After implementing a portfolio plan, the management process begins. This includes monitoring the investments and measuring the portfolio’s performance relative to the benchmarks. It is necessary to report investment performance at regular intervals, typically quarterly, and to review the portfolio plan annually. Once a year, the investor’s situation and goals get a review to determine if there have been any significant changes. The portfolio review then determines if the allocation is still on target to track the investor’s risk-reward profile. If it is not, then the portfolio can be re-balanced, selling investments that have reached their targets, and buying investments that offer greater upside potential.

Don’t keep all the eggs in a single basket: Do not invest all your funds in a single cap, make sure to diversify your investment portfolio to balance the risk. We’ve all heard that phrase in our lifetimes and probably used it as well. This philosophy pertains to much in life and particularly in investing when we talk about diversification. With the Diversification in portfolios, investors can avoid the temptation of reacting to the daily ebbs and flows of the market. The basic advice on portfolio diversification is to hold a variety of asset classes including stocks, bonds, real estate and cash. The proportions of various caps vary based on your risk tolerance and investing time horizon.

Time horizon:
An investor with a long-time horizon, who is willing to take on more risk in exchange for higher potential returns, may want to hold a larger allocation of small-cap and mid-cap stocks.

 An investor with a shorter time horizon, who is looking for less volatile stock returns or for stocks that will provide more stable dividends, may want to hold a larger allocation of large-cap stocks.

The investment advisers can help build a portfolio that is appropriate for your given risk tolerance, time horizon, and financial goals.

Present scenario as per the various fund managers from various sources

The days are not going in the right way to mid-cap and small cap stocks, but they are likely to bounce back. The current rally of the market is showing some positive signs over these caps. As the Modi’s army performed well in the elections, small cap and mid cap mutual funds may continue to gain in the coming days. As of now, the short term performance of small cap and mid cap mutual fund schemes underscore the trend.

Views of fund managers
Fund managers are expecting an encouraging performance from the mid cap and small cap segments as these two segments have seen a correction, so the valuation may become healthier.  This revival may not happen in a nano period. They might not outperform but come out of doldrums in the near future.
The major hurdle for under performance in the past for these two segments was interest rates. Easing the rates gave some ignition to the market of the small and mid cap segments. This should be added by transmission of rates by the banks, due to lack of it, these segments not performed up to the mark in the near past.

Small and mid cap mutual funds have been shackled in the last one year but there are signs of revival in the short term. However, fund managers believe that investors shouldn’t expect too much from these schemes 

The investors shouldn’t make the error of viewing the entire small and mid cap segment as a single segment. They point out that the only quality mid and small cap stocks would outperform in the current market. One should select quality companies which will do well, but for the entire segment we will have to wait for the government to fix liquidity, GST compliance issues and tighten macros for smooth revival in mid and small cap segments. According to these fund managers it is always a good time to invest in small and mid cap schemes If you have the risk appetite and a long investment horizon. Investors can invest in small and mid caps at any point of time.

Dr. CMA V.V.V. Phani Kumar
Manager (F&A) – Rashtriya Ispat Nigam Limited (RINL)

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