Introduction
The idea of this smallcase is to invest in smallcap stocks (market capitalization of less than Rs 5000 crores), as they are more affected by macro events. Historically, these smallcaps tend to perform better as the economy enters a growth phase. Some investors may confuse it with penny stocks, but it is essential to learn the difference between the two. While both represent companies with low market capitalization, penny stocks are classified based on their share price unlike the other. Smallcaps do trade on small exchanges whereas penny stocks usually trade over the counter.
Investment Drivers
The portfolio focuses on 10-15 growth oriented smallcaps that will not only outperform their industry peers during the economy-recovery phase but would also step up the wealth creation journey of our clients. Terminal value is a major investment driver here which is arrived at after identifying stocks based on various factors.
Apart from our basic requirements, we onboard companies who have Return on Equity and Operating Margins greater than 15%. Not only this, Debt to Equity ratio is also taken into consideration which must be less than 100%.
Investment Philosophy
With the sole purpose of multiplying the wealth of our investors, we only consider companies with strong balance sheets and low debt on books. The main philosophy behind this smallcase is the significant upside growth potential of smallcap funds that is unmatched by larger companies. While curating this fund, we followed Reasonable Price Policy, i.e., companies available at reasonable valuations as compared to their earnings potential. We constantly monitor their financial results and take part in management concalls as well.
Avoiding Highly Leveraged Business: In our view, over leveraging is the best way to sink a business and weaken its ability to adapt and capitalize on new opportunities. Hence, we avoid businesses that have a Debt to Equity ratio higher than 100%.
Who should invest in this smallcase?
Some investors assume that individual small undervalued companies are more likely to fail than large caps. However, investing in a small-cap value index fund is actually much safer than buying any single large-cap stock. They are also more likely to produce higher returns. Investors looking to appreciate their capital over the period 3-5 years with medium volatility can add this smallcase to their portfolios.