Small investments, big profits

The Indian equity markets have been volatile since the past few months with select stocks and sectors delivering phenomenal results. Although a few small and mid-cap stocks have been generating returns on a continuous basis, such stocks are known to be risky as compared to other equity schemes vying for investors’ attention. Schemes such as SBI Emerging Businesses Fund, Axis Midcap Fund and Franklin India Smaller Companies Fund have given if eye-popping returns in the past few years. A few of them are giving returns between 25 percent and 30 percent in the last one year. So the question that needs to be asked is whether this is the right time to invest in small- and mid-cap funds if they do not have it in their portfolios.

Experienced investors feel that small- and mid-cap funds are great to get ahead of the markets against popular large-cap stocks. Yet, there are those who believe that small- and mid-cap funds are an invitation to disaster.

If we look at these statements, we find that both of them hold ground and are right in their own ways. During the great bull rally of 2003 to 2007, many small- and mid-cap stocks repeatedly ran ahead of large-cap stocks and then fell back as sharply as they had risen. However, the moral of the story is not to avoid investing in small- and mid-cap stocks. Instead, investors can follow a pattern and exploit volatility in the markets to yield higher returns. Moreover, there is no right time to enter or exit the markets. And it is, therefore, said: “Do not time the markets. No matter what, investors should have a minimum exposure to small- and mid-cap stocks. But the investors must be careful regarding the additional risks associated with such funds as they are extremely volatile in nature. The positive performance of many small- and mid-cap stocks is mainly due to cheap valuations of many quality stocks. However, the gap between valuations of small- and mid-cap stocks and large-cap stocks has narrowed down after the recent rally in small- and mid-cap stocks. In the past few weeks, we have seen good quality large-cap stocks rallying as their valuations are little attractive compared to other small- and mid-cap stocks. But there is always an opportunity to invest in high-growth stocks which is possible in small- and mid-cap companies. However, before deciding to invest in small- and mid-cap funds, investors

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