Small cap funds – An opportunity for wealth creation

Investing in companies with small market capitalisation can be one of the most difficult and potentially rewarding styles. It's difficult because historically during market downturn small caps are battered the most. However, over a longer-term, small cap have the potential to outperform. Smaller businesses are often faced with relatively higher uncertainty in terms of their business and profit growth. Therefore it is necessary to spot the long-term winners among a host of small cap companies which are available for investment, to be able to benefit from their growth potential. In the past 15 months, stock market recovery has been astonishing. The rally has boosted strong returns in the small cap category largely due to the economic recovery, coupled with the gush of liquidity and expectations of an improvement in earnings in the coming quarters.

Why invest in Small cap companies?
Smaller companies that are in a relatively early stage of a growth phase, typically offer significantly higher long-term growth potential compared to their established larger counterparts. The most often overlooked, under-researched and under-owned companies in the stock market lie within this space. Some of these emerging companies comprise of stocks with sound fundamentals and therefore create a considerable potential for growth.

Here are a few reasons why small caps offer good investment potential:
Better bets in the revival phase: It has been observed in the past that after sluggish periods, or when equity markets have rallied after elections, small caps have performed better than their counterparts.
Scope of getting bigger: Think of the 'small' software company that became a big name to reckon with globally. What if you had the chance to invest in it when it was a mid-sized company? There are hundreds of small cap companies that have proven their mettle and have the potential to grow at a much faster rate than their larger counterparts.
Small caps have performed better in the long-term: From a long-term perspective, small cap stocks have been known to outperform large cap companies despite underperformance over short terms.
Small caps are under-researched: It is a bitter truth that small cap stocks are under-researched and hence under-owned. There lies an immense opportunity to pick the under-valued stocks and unlock their latent value.
Small caps could offer attractive investment opportunities given their modest prices combined with an improving economy and optimism surrounding reforms by the new government. Adding them to one's investment portfolio could enhance diversification and unlock a hidden treasure in value.

What we look for in a small cap company?
Though smaller companies have the potential to grow at a higher rate, not all smaller companies would grow to become mid or large cap.

The key is to identify companies with
  Scalable opportunities
  Competent management / promoters
  Strong corporate governance practices
  Balance sheet strength
  Competitive edge
Stocks of such businesses when bought at appropriate valuation levels could offer upside potential over the medium to long term.

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Disclaimer – This information is for general information only and does not have regard to particular needs of any specific person who may receive this information. L&T Investment Management Limited, the asset management company of L&T Mutual Fund or any of its associates; does not guarantee/indicate any returns/and shall not be held liable for any loss, expenses, charges incurred by the recipient. The recipient should consult their legal, tax and financial advisors before investing. Recipient of this information should understand that statements made herein regarding future prospects may not be realized or achieved.

The returns from mutual funds are subject to market fluctuations while returns on savings account, fixed deposits and bonds are fixed.


Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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