Unlocking Growth Potential - The Strategic Advantage of Adding Small Cap Stocks to Your Portfolio

While large-cap and mid-cap stocks often get the attention they deserve, small-caps tend to be overlooked. Though risky and volatile, they hold significant growth potential and can be a strategic addition to your investment portfolio.

What are small-cap stocks?

Small-cap stocks represent companies with a market capitalisation of less than Rs 5000 crores. These companies are in the early stages of their growth and offer you a unique opportunity to capitalise on their expansion. Though they lack the stability of large caps, they have a much higher growth potential.

Benefits of investing in small caps

Given below are the advantages of investing in small-cap stocks:

• High growth potential

Small-cap stocks have high growth potential. Smaller companies have more room for expansion, and their earnings can grow at a faster pace compared to established firms. Their rapid growth can translate into significant returns for investors. As these firms grow, their stock prices tend to rise, thus providing considerable capital appreciation.

• Provide diversification

By investing in small-cap stocks, you can diversify your portfolio, which can lead to better overall performance. This can be more helpful, particularly in a growing economy like India’s.

• Potential for market outperformance

Small caps have the potential to outperform markets in the long run. This outperformance can be primarily attributed to the agility that these companies bring. They are more adaptable to changes in the market, which can result in faster growth.

• Access to emerging industries

Small-cap stocks often represent companies in emerging industries that are on the brink of significant growth. Investing in these companies can help you access sectors that can play a crucial role in shaping the future economy.

Important things to keep in mind while investing in small caps

While investing in small caps can offer these benefits, there are certain other things to keep in mind. These include:

• High risk and volatility

Small caps are subject to pretty high risks. They are more likely to face financial difficulties and may not have the financial muscle of large or mid-cap firms. Also, they are more susceptible to market fluctuations than large and mid-caps.

• Low liquidity

Small-cap stocks have limited trading volumes. This makes it difficult to sell them, and hence, they can face liquidity issues.

Invest in small-caps with Smart Alpha

While investing in small caps, you need to have a high-risk tolerance. Equally important is to invest after due diligence. Smart Alpha from Kotak Securities’ StockCase allows you to invest in small-cap stocks on the go. Curated after extensive research by analysts at Kotak Securities, it is your gateway to exploring and investing in the small-cap universe with prudence. Click here to know more.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in securities market are subject to market risks, read all the related documents carefully before investing. Brokerage will not exceed SEBI prescribed limit. The securities are quoted as an example and not as a recommendation. SEBI Registration No-INZ000200137 Member Id NSE-08081; BSE-673; MSE-1024, MCX-56285, NCDEX-1262. For compliance T&C and disclaimers, Visit bit.ly/ksecdisc.

All baskets are curated by our internal Kotak Securities Research team. Exchange approval will be taken in future if in case 3rd party baskets are listed on StockCase. Baskets are not Exchange approved products and any disputes related to the same will not be dealt on the Exchange platform.