- Date : 25/09/2023
- Read: 3 mins
Micro-cap stocks have been on the rise, drawing the attention of mutual funds. But is it the right move for your investment portfolio? Let's break it down.
In recent times, micro-cap stocks, those typically following companies ranked beyond the top 500 in market capitalisation, have been making waves. Mutual funds are diving into this zone in search of higher returns. But is it a smart move for individual investors?
Mutual funds are increasingly drawn to the surging micro-cap stocks.
Micro-cap stocks are showing high price-to-earnings (P/E) ratios, possibly indicating overvaluation.
They have historically outperformed the Nifty 50 index over the medium to long term.
While micro-cap stocks may offer high returns, they also come with significant risks, including liquidity issues.
What are the numbers?
Data from the Prime MF Database reveals that the value of micro-cap stocks in mutual fund schemes soared from Rs 45,482 crore in September 2022 to Rs 60,229 crore in August 2023, a 32% surge. This reflects the steep rise in small- and mid-sized company stock prices during this period. In contrast, the overall equity assets under management (AUM) in the mutual fund industry increased by 22% to Rs 22.07 lakh crore during the same period.
Micro-caps vs. the rest: Are they outperforming?
Over one year, the Nifty 100 Total Return Index (TRI) saw a gain of 10%. In contrast, the Nifty Micro-Cap 250 TRI surged by 44%, and the Nifty Small-Cap 250 TRI rose by 28%.
Are micro-caps overpriced?
Micro-cap stocks' valuations have become steep, as reflected in their high price-to-earnings (P/E) ratios. A high P/E ratio can signal an overvalued stock.
What do the experts say?
While micro-cap stocks have historically outperformed the Nifty 50 index over the medium to long term, experts warn that the segment might be getting ahead of itself in terms of valuations. Shrey Jain, Founder and CEO of SAS Online, advises investors to be cautious and selective in this space.
Are there new funds that are focusing on micro-caps?
Mutual fund houses are increasingly eyeing micro-cap stocks. Like Motilal Oswal Mutual Fund launched India's first passive scheme focusing on micro-cap stocks, garnering significant investment. Now, Bandhan Mutual Fund is preparing to introduce India's first active scheme targeting micro-cap stocks.
What are the challenges?
One challenge in the micro-cap space is liquidity. Small-cap funds, which are riskier, have the highest exposure to micro-cap stocks. Some small-cap funds have even had to limit fresh investments due to liquidity issues.
Should you invest in micro-caps?
While micro-cap stocks may offer promising returns, they come with substantial risks. Factors like lack of liquidity, volatility, limited information, and higher fraud risk make them riskier. If you're considering investing in micro-caps, be well-informed. Assess your risk tolerance and long-term investment goals. Experts suggest that micro-cap funds are best suited as part of a satellite portfolio, not a core one.
Find the latest articles on mutual funds here.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.