- What are small cap stocks?
- List of best small cap stocks
- Characteristics of a small cap stock
- What should you look for before investing in a small cap stock?
- Alternatives of investing in a small cap stock
What are Small Cap Stocks? – Definition of Small Cap StocksThe Securities and Exchange Board of India (SEBI) defines small cap stocks as companies ranked beyond 251 as per market capitalisation.
But what is market capitalisation?Market capitalisation simply means the total value of a company’s shares. It is calculated by multiplying outstanding shares by current share price of a company. So, if a company has 20,000 outstanding shares in the market each priced at Rs 20. The market capitalisation of the company is Rs 4,00,000. Recommended reading: What is market capitalisation with examples? The market capitalisation of small cap companies is generally less than Rs 5,000 crores. Small cap stocks have the potential to deliver superior returns in the long term. But they are incredibly volatile and are riskier than large cap and mid cap stocks. There are two main small cap indices in India. These help investors gauge the overall trend of small cap stocks.
List of Best Small Cap Stocks in India – As of June 2021
|Company Name||Symbol||Samco Stock Rating||Current Market Price||Industry|
|Gujarat Narmada Valley Fertilizers & Chemicals Ltd (GNFC)||GNFC||0.5||372.4||Chemicals|
|Dhanuka Agritech Ltd.||DHANUKA||4||979.8||Fertilizers & Pesticides|
|VST Industries||VSTIND||5||3464.1||Consumer Goods|
|KEI Industries||KEI||0.5||716.9||Industrial Manufacturing|
|JK Paper Ltd||JKPAPER||0.5||236||Paper|
|Sterlite Technologies Ltd||STRTECH||0.5||282||Telecommunication|
|INOX Leisure Ltd||INOXLEISUR||0.5||420||Media & Entertainment|
|Delta Corp Ltd||DELTACORP||0.5||265||Services|
|Bajaj Consumer Care||BAJAJCON||5||235||FMCG|
|CARE Ratings||CARERATING||3||689||Financial Services|
|Gulf oil Lubricant Ltd||GULFOILLUB||3||586||Oil & Gas|
|Thyrocare Technologies Ltd||THYROCARE||2||1,146.95||Healthcare Services|
|Mishra Dhatu Nigam Ltd.||MIDHANI||2||190.40||Metals|
|TCNS Clothing Ltd||TCNSBRANDS||0.5||766||Textiles|
|Affle India Ltd||AFFLE||5||1,065||Telecommunication|
Characteristics of Small Cap Stocks
1. High VolatilitySmall cap stocks belong to less stable companies and hence they are highly volatile. They underperform large and midcap stocks in a bear market. But small cap stocks are outperformers in a bull market.
2. High RiskSmall cap stocks belong to lesser known companies having limited cash reserves. So they are more likely to have negative cash flows during economic slowdowns. Due to this, small cap companies have a greater chance of going bankrupt during economic contractions.
3. Superior Growth PotentialRisk and returns goes hand in hand. Small cap stocks are highly risky. But they also provide superior growth. For example: Delta Corp Ltd is one of the best small cap stocks in India. In March 2020, it was trading near its 52-week low at Rs 59.39. Today its stock price is Rs 265. It has generated a CAGR of 145.34% in the last 1 year! Such growth opportunities are not available in large-cap stocks.
4. Low liquiditySmall cap stocks are generally less liquid compared to large and midcap stocks. This is because very few investors trade in small cap stocks. However, a stock can become liquid over time with better price discovery and broader stock ownership.
Historical Performance of BSE Small cap vs Sensex
What Should You Look at Before Investing in Small Cap Stocks?
1. Financial strength of the companyThe share price of a company rises when it has a sound financial background. While analysing the financial strength of a company you must look for:
- Decent liquidity ratios like current ratio and quick ratio.
- The company’s cash flow should remain consistent over years.
- Low debt on the balance sheet.
2. Rising sales and profitsSmall cap companies have low cash reserves. They are heavily dependent on their sales. Hence, before investing in a small company you must check its sales and profit numbers for at least 5 years. Rising sales can help the company grow quickly. High profits help the company improve its income and margins through cost optimisation. A company with consistent growth can provide good returns to its investors in the long term.
3. High operating marginOperating profit margin measures the profitability of a business. This ratio helps us understand how much percentage of profits the company generates from its operations before paying taxes and interest. A company with consistently increasing operating profit margin can prove to be a good investment opportunity.
4. Quality of managementSmall cap companies do not have much room for error. Even a small management error can spell doom for them. Hence investors should do a thorough background check of the company’s promoters and management before investing. Check out our video on how you can identify the best small cap stocks to buy in India.
Alternatives to Investing in Small Cap StocksInvesting in small cap stocks involves huge risk. Hence, you must include large cap and mid cap stocks to balance your overall portfolio. But selecting one or two small cap stocks from more than 250 stocks is difficult. Instead investors can invest in small cap mutual funds. They help in portfolio diversification, and are professionally managed by experts. Small cap mutual funds invest 80% of their corpus in stocks of small cap companies. The remaining 20% is invested in large cap or midcap stocks. In the long run, small cap mutual funds have outperformed large and midcap mutual funds.
Historical Returns Provided by Mutual Funds
List of Best Small Cap Mutual Funds in India for 2022
|Small cap fund||6 months||1 Year||3 Years||5 Years||AUM (in Rs Cr)||Expense Ratio|
|Axis Small Cap Fund – Regular Plan Growth||32.79%||75.10%||33.81%||20.86%||Rs 7302.98||2.01%|
|Kotak Small Cap Fund – Growth||36.75%||101.98%||36.40%||20.21%||Rs 5,969.44||1.95%|
|DSP Small Cap Fund – Regular Plan – Growth||33.22%||77.19%||28.74%||14.61%||Rs 8305.79||1.83%|
|SBI Small Cap Fund Regular Growth||27.51%||75.11%||29.61%||21.50%||Rs 10191.43||1.77%|