Small-Cap Investing: Is it a Smart Choice for investors on a tight budget?

8 May 2023
4 mins read
by Angel One
This article will help you to discover whether investing in small-cap stocks is a smart choice for investors on a tight budget.
Small-Cap Investing: Is it a Smart Choice for investors on a tight budget?

Investing in the stock market is a great way to grow your wealth over time. However, many small investors in India have limited funds and are hesitant to invest in the stock market due to perceived risk and volatility. But small-cap investing is a smart choice for small investors on a tight budget. In this blog, we will explore why investing in small-cap stocks can be a smart choice for small investors in India.

What are Small-Cap Stocks?

According to the Securities and Exchange Board of India (SEBI), small-cap stocks are defined as stocks of companies that rank between 251st and 500th in terms of market capitalisation. SEBI categorizes stocks based on their market capitalisation into large-cap, mid-cap, and small-cap. Large-cap stocks are stocks of companies with a market capitalization of more than Rs 45,000 crore, mid-cap stocks are stocks of companies with a market capitalisation approximately between Rs 15,000 crore to Rs 45,000 crore, and small-cap stocks are stocks of companies with a market capitalisation below Rs 15,000 crore. Having said that, these figures are just to give you a rough idea and are subject to change.

Read: Difference Between Large Cap Vs Small Cap Vs Mid Cap Stocks

Advantages of Small-Cap Investing for Retail/Small Investors in India

Potential for Higher Returns: Small-cap stocks have the potential to generate higher returns than large-cap stocks. Since small-cap companies are still in the early stages of growth, they have a higher potential for growth. This means that their stock prices can rise significantly over time, resulting in higher returns for investors.

Undervalued Stocks: Small-cap stocks are often undervalued by the market. This is because these companies are not as well-known as large-cap companies and do not receive as much media attention. This presents an opportunity for small investors to buy these undervalued stocks at a lower price and benefit from their future growth.

Diversification: Small-cap stocks can offer diversification to small investors. By investing in small-cap stocks, small investors can diversify their portfolio and reduce their overall risk. This is because small-cap stocks are less correlated with large-cap stocks, which means that their prices may not move in the same direction as large-cap stocks during market fluctuations.

Risks of Small-Cap Investing for Small Investors in India

Volatility: Small-cap stocks are more volatile than large-cap stocks. This means that their prices can fluctuate significantly in a short period of time. Small investors need to be prepared to weather these fluctuations and hold their stocks for the long term to benefit from their growth potential.

Liquidity: Small-cap stocks are less liquid than large-cap stocks. This means that there may not be as many buyers and sellers for these stocks, which can make it difficult to buy or sell them when you need to.

Risk of Failure: Small-cap companies are at a higher risk of failure compared to large-cap companies. This is because they are still in the early stages of growth and may not have established a solid customer base or revenue stream. Small investors need to carefully research the companies they invest in and ensure that they have a solid business model and growth potential.

Tips for Small Investors in India to Maximize Returns on Small-Cap Investing

Do Your Research: Small investors need to research the companies they invest in carefully. This includes understanding their business model, revenue stream, growth potential, and competitive landscape. Small investors should also look for companies with a solid management team and track record of success.

Invest for the Long Term: Small-cap stocks are volatile and can experience significant fluctuations in the short term. Small investors need to be patient and invest for the long term to benefit from their growth potential.

Diversify Your Portfolio: Small investors should diversify their portfolio by investing in a mix of small-cap, mid-cap, and large-cap stocks. This can help reduce their overall risk and maximize their returns.

Stay Updated on Market Trends: Small investors need to stay updated on market trends and news related to the companies they invest in. This can help them make informed decisions and take advantage of opportunities to buy or sell stocks.

Check Nifty Smallcap 100 index & BSE Small Cap to see the list of small-cap stocks.

Conclusion

Small-cap investing can be a smart choice for small investors who are on a tight budget. While small-cap stocks are riskier than large-cap stocks, they also have a higher potential for growth and can generate higher returns over time. Small investors need to do their research, invest for the long term, diversify their portfolio, and stay updated on market trends to maximise their returns on small-cap investing. By following these tips, small investors can benefit from the growth potential of small-cap stocks and grow their wealth over time.