Small-cap companies are those having a market value of less than Rs. 500 crores. Over 95% of Indian companies are classified as small-caps.
This sort of company has a rank outside of the top 250 listed companies in terms of market capitalization, and tends to do well during the early stages of economic recovery; the stocks issued by such firms are known as small-cap stocks.
What Are Small-cap Stocks?
Small-cap stocks, often known as small-cap equity, are publicly traded shares of small-cap companies. Small cap stocks are a good alternative for investors who wish to create better returns on their investments. Individuals with a high-risk tolerance and the ability to withstand market hazards may also be interested in this investing choice.
These stocks are highly volatile and vulnerable to market hazards when the market is in a slump. Investors can mitigate the risk associated with small-cap equities by diversifying their portfolios with market-friendly alternatives.
Best Small cap Stocks To Invest In India 2022
| Fund Name | Market Price (Rs.) | Market Cap. (in Cr) | 3 Year Returns |
| JBM Auto | 431.05 | 4,975 | 358.32% |
| Just Dial | 597.6 | 4,961.00 | 4.45% |
| MTAR Technologies | 1,600.45 | 4,941.00 | 52.76% |
| Tatva Chintan | 2,238 | 4,929.00 | 5.81% |
| Elecon Engg Co | 465.15 | 4,923 | 1233.05% |
| Greenpanel Industries | 387.7 | 4,868.00 | 760.22% |
| VRL Logistics | 568.7 | 4,858.00 | 107.47% |
Factors To Consider Before Investing In Small-cap Stocks
Individuals interested in investing in small-cap companies should be aware of the following characteristics:
Volatility: Because the NAV of small-cap companies is significantly impacted by market fluctuations, they are volatile. For example, these stocks outperform when the market is performing well but underperform when the market is struggling.
Risk Factor: Because small-cap stocks rely on the market, they are vulnerable to market changes. Small-cap stocks are more vulnerable to market downturns and take longer to recover from them, making them a hazardous investing option.
Returns: Small-cap stocks are among the highest-yielding investing alternatives. They are seen to have the potential to become multi-baggers by returning more than 100%.
Cost of Investment: In addition to the initial cost of purchasing small-cap stock, buyers must pay an annual fee known as the Expense Ratio. The maximum allowed is 2.5% of the average AUM. Investors that invest in small-cap stocks with the lowest Expense Ratio will earn higher returns.
Investment Horizon: Individuals can invest in small-cap stocks in India for both long-term and short-term gains. However, investors should choose small-cap stocks with a long investment horizon to spread the risks associated with them while still generating significant rewards.
Taxation: Under Section 80C, the returns earned by the redemption of small-cap shares are considered income. If the shares were held for less than a year, the profits are subject to short-term capital gain tax at a rate of 15%. Gains on shares held for a year, on the other hand, would be subject to a 10% long-term capital gain tax.
The Major Benefits Of Small-Cap Stock
Individuals that invest in the finest small-cap companies benefit from the following advantages:
Small-cap firms have a higher organic growth rate than large-cap enterprises. Small-cap companies, on the other hand, have a larger possibility for growth and capital acquisition over time. This factor favours small-cap stocks and significantly boosts their growth potential.
When it comes to investing in the greatest small-cap businesses, major institutional investors must comply with specific constraints; this immediately limits their ability to push stock prices higher. This gives small investors an edge over institutional investors and allows them to get small-cap shares at reasonable costs.
Small-cap companies are underappreciated, and their stocks are undervalued as a result of potential market inefficiencies. With a little study and market analysis, investors may profit from such inefficiencies by purchasing high-quality equities at a reduced price.
Major Checklist Before Investing In Small-cap:
- Considering the company’s prior performance is typically the key to determining the stability of mid-cap and small-cap enterprises. And by prior performance, we mean the last 4-5 years.
- The major goal of investing in small caps is to earn big returns or market returns that are above average (alpha).
- Before investing, consider the company’s capacity to manage its working capital, as well as the stability and competence of its management team. The goal is to identify the next multi-bagger investment.
- Examine the risk associated with their business plan. Some firms, such as NBFCs and MFIs, are riskier than others.
- During difficult economic times, the strength of a company’s foundation is put to the test. As a result, your stock selection should be based on the company’s reliability throughout difficult market situations.
- Its share price’s future trajectory is heavily influenced by its growth and profit margins.
- Finally, think about the stock’s liquidity and basis risk. If there is little liquidity, it is better to avoid stocks, particularly small-cap stocks.
How To Invest In Small-cap Stocks?
Kuvera allows you to invest hassle-free in stocks. Since it is completely free and assists you in selecting the ideal investment for your financial objectives, it is the greatest platform for mutual fund investing.
Follow these instructions to invest in mutual funds through Kuvera:
Step 1: Register at kuvera.in
Step 2: Complete the KYC procedures and link your bank account
Step 3: In the Explore section, click on stocks to invest
Step 4: Choose the best stock based on your unique requirements and risk tolerance.
Step 5: Enter the amount you wish to invest and select the appropriate payment method by clicking the “Buy” button.
