Explore Your Investment Possibilities

Sanjay M Nanavati
Sarathi Investment Services

When it comes to building a long-term portfolio, equities have an important role to play. Here, the first point of choice is investing into names which are well-established, fundamentally sound and have a robust balance-sheet. All of these attributes are often fulfilled by large-cap companies, and hence they become the starting point of choice for an investor. Not to forget that these names are less volatile as well. So, one need not harbour the thought of losing 20 per cent or 50 per cent of the capital invested in a single day. It is this fear which keeps us away from exploring the investment possibilities which mid-caps and small-caps can offer.

Case for Mid-Caps and Small-Caps

Let us consider an investor who is investing for the long term for a certain financial goal which is say 15 years away. In such cases, ignoring mid-caps and small-caps can prove to be a costly mistake. In a country like India, which is still a developing market, there are several opportunities which are available in the mid-cap space but not in large-caps, as for example, hotels. Even the best listed hotel entity is a mid-cap company in India. As the economy goes through cycles, so will the companies go through cycles. There will be pockets where the quarterly results will be better than expected and there will surely be pockets where the earning will be disappointing.

This is bound to translate into stock price volatility which is often unnerving. But over a decade, strong companies tend to emerge stronger and the same gets reflected in the stock prices as well. Similar is the story for small-caps as well. Many of the companies we today know as a sector leader started out as a small-cap once upon a time. These grow over time quietly and at times the stock prices may not even reflect the fundamental strength of these companies. But over time, as the balance-sheet gets stronger and as they emerge to become a major player in their respective fields, the stock price within a very limited time gathers pace, and emerges to be a multibagger.

Time to Invest?

Since the March lows, mid-caps and small-caps have staged a Financial Planning smart recovery, driving up valuations. It is interesting to note that most of the rallies seen in the broader markets have been led by only a handful of stocks, making several names still available at attractive valuations. As a result, equity markets, especially in terms of mid-caps and small-caps in terms of valuations, are in a neutral zone wherein they are neither cheap nor expensive. Furthermore, the frothiness in the valuations of mid-cap and small-cap segment is not there anymore and the segment has corrected drastically as compared to large-cap over the last couple of years.

This means now is the time to take a staggered approach to investment which will enable participation in equity markets and would help in limiting downside risks. Some of the key triggers which may influence the markets are resurgence of the corona virus’ second wave of infections globally and in India, policy-making of the newly elected US’ government, domestic earnings’ growth and vaccine development and distribution.

Choosing the SIP Way

By investing through SIP one gets the opportunity to make investments in a disciplined manner and remove emotions from investments as well as benefit from rupee cost averaging over time. American economist and investor Benjamin Graham once said, “Successful investing is about managing risk, not avoiding it.” This very well applies when it comes to investing in mid-cap and small-cap stocks. To successfully manage risk in mid-cap and small-cap investments one should focus on investing in a regular and consistent manner for a long term.

That is why the SIP route may be the optimum and a more efficient way to invest in this space. The long tenure of the investment (5+ years at least) will help address the risk element as it gets distributed across the investment period. To conclude, there is no need to fear the broader market indices. When one decides to invest with a long-term view, one opens the door to higher growth potential and the possibility to generate good returns. As you stay invested, the company gears up to tread on its potential growth path during the same period.

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