Small cap stocks in India are stocks of companies listed on stock exchange with a market capitalization of less than Rs. 5,000 crores. Market capitalization is calculated as Share price x Total number of outstanding shares in the market. Investing in small cap stocks is very risky. If one is investing for wealth creation or specific goals like retirement planning, child education, buying a home etc then it is better to stay away from investing in small cap stocks.
Features of Small Cap Stocks
- Small cap stocks are very volatile and are influenced by market fluctuations.
- These are very risky.
- Small cap stocks are generally fairly priced and affordable.
- Small cap stocks have the ability to generate multi fold returns.
- These stocks are normally not included in any major market indexes.
Advantages & Disadvantages of investing in small cap stocks
| Advantages | Disadvantages |
| Small cap stocks have a huge growth potential. If right small cap stocks are chosen, these give high returns on investments | Small cap stocks are highly risky and very volatile. |
| These are normally not actively followed in the market. They are generally not tapped by institutional investors. An informed investor can grow their investment quickly by picking the correct small cap stock. | These are less liquid compared to large cap stocks |
Alternatives to investing in small cap stocks
Investing in Small cap stocks is a very risky idea. Listed below are some of the alternatives:
- Sovereign Bonds: These bonds are issued by the Government. The bonds offer minimum risk and a regular source of income over a fixed period.
- Debt Funds: These funds invest in fixed income securities like treasury bills, bonds etc. They provide low risk and regular income.
- Balanced Funds: These funds invest in equity instruments and debt in a certain ratio. They provide a risk-reward balance.
- Flexi cap Funds: These funds invest in stocks spread across the large cap, mid cap and small cap categories. There are no restrictions to investing in companies based on market capitalization.
- Large cap stocks: Investments in large cap stocks bring in stability along with long term capital appreciation.
