Companies with low market capitalization of Rs. 500 crore are classified as small-cap companies. Over 95% of Indian companies are considered small caps.
The company is expected to perform during holds a rank above 251 and thus the economic recovery in the early stage and called small-cap stocks issued by companies shares.
What are small-cap stocks?
For investors who want to generate more profits from their investments, small-cap stocks tend to be a better option. In addition, individuals who may want to consider high-risk tolerance levels and investment options market can bear exposure to risk.
These are volatile stocks nature and prone to market risk when the market is going through a low phase. However, investors can cushion the risk factors of market-friendly investment by adding small-cap stocks to their portfolio.
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Features of Small-Cap Stocks
Individuals who want to invest in small-cap stocks should learn about these following features –
- Volatility: The influence of small-cap stocks NAV movement of heavy market volatility, is making them unstable in nature. For example, these stocks perform well during the high market phase but perform weakly when the market is struggling.
- Risk factor: Dependence of small-cap stocks on the market that makes it susceptible to ups and downs. These stocks are likely to take time to recover from the impact of the market downturn and the same; Which makes the small-cap stocks a risky investment option.
- Returns: Small-cap stock are among the top-yielding investment options.
- Cost of Investment: In addition to the initial cost of acquisition of small-cap shares, investors will also have to pay what is called an annual charge expense ratio. The upper bound of the same is 2.5% of the average of the AUM. Investors who invest in small-cap stock with the lowest expense ratios will generate better returns than those.
- Investment Horizon: Individuals can invest in small-cap stock in India for both the long and short term. However, investors have to come up with a long investment horizon to spread the risks associated with small-cap stock and those should also choose to generate adequate returns.
- Taxation: Returns generated on the redemption of small-cap shares are treated as income under section 80C. The profits thus generated are subject to short-term capital gains tax at the rate of 15% if the shares were held for less than a year.
Reasons to Invest In Small-Cap Stocks
There are three compelling reasons why an investor may want to consider putting your money in small-cap stocks.
- Benefit from the growth potential of small-cap companies.
- Take advantage of low-cost quality Banking stocks due to market inefficiencies.
- Reasonable prices that opportunity to take advantage of small-cap stocks are not affected by large financial institutions
Investing in Small Cap vs. Large Cap Companies
As a general rule, investors of small-cap companies provide greater space for growth, but also provide greater risk and volatility than large-cap companies. A large cap offering has a market capitalization of $ 10 billion or more. With large cap companies, such as General Electric (GE) and Boeing (BA), the most aggressive growth gets in the rear view mirror. As a result, such companies provide greater investors stability than the market returns that crush the market.
Associated Risks of Small-Cap Stock
The risks associated with investing in small-cap stocks in India are listed below –
- Is susceptible to market risks that can only be cushions in the long term through appropriate asset allocation and portfolio balance.
- Investors are cautioned that offers relatively low liquidity and makes it cumbersome sales process.
- Determine their effectiveness as an investment avenue to require time and research.
While small-cap stocks tend to generate better returns, they come with a significant risk burden. Individuals risk averse or will not be conducive to such investment options in conservative investors. They can not take that advantage should also understand the benefits of getting more profit through small caps.
Alternative Investment Options
Another note, if investors do not need a sturdy risk appetite market ups and downs of the weather, they can choose a less risky investment options.
Investors can put their money in these alternative investment avenues –
#1. Large-cap stocks –
Who is in the top 100 companies shares are classified as large-cap stocks. Large cap stocks are susceptible to low market volatility. This makes them suitable for the investor’s long-term, which is a moderate to low risk appetite.
#2. Hybrid Funds –
Who is in the top 100 companies shares are classified as large-cap stocks. Large cap stocks are susceptible to low market volatility. This makes them suitable for the investor’s long-term, which is a moderate to low risk appetite.
#3. Government Securities –
You can invest in as well as government securities with individuals.
Whether it is small-cap stocks or mutual funds, investors should always opt for an investment opportunity that suits their needs and their financial situation.
Also, investors should take their risk appetite and allocate their investments accordingly before investing in consideration.
However, if individuals are not very well versed with their market knowledge, they always have the option of seeking professional help.