Ajitansh Kar, Gurugram, 5 October 2023
All of us are familiar with companies like Asian Paints, Bajaj Finance, Nestle, Reliance, Tata Steel, and TCS, among others. They are regarded as the highest quality stocks listed on the exchange; they fall under the umbrella of blue-chip businesses. Most investors who participate in the markets tend to stick with these companies as they are perceived to be safer than others. Even though these organisations are properly run, have a long history of ethical corporate governance, and typically hold a monopoly or duopoly over the industries in which they operate, they will not appeal to someone looking to amass enormous riches in the future.
Since we all know that these companies have the potential to return an average of 10% to 12% annually on a conservative basis for a very long time, the last statement of the preceding paragraph may sound disputable to some. Millions of Indians have trusted these companies and have preferred to invest in them as their products have now been widely recognized for decades. A 20-year period of compounding at a rate of 12% would result in an approximate 10x return on your initial investment, which many people could deem to be excellent. For young people or those with limited resources, large-cap stocks are not a good idea since even if your money were to increase by a factor of ten, your principal would still be so small that the profits would be negligible. Large cap stocks already have market cap worth lakhs of crores which leaves very less headroom for exponential growth in stock price. The best option for investors who wish to take less risk and stick to safer returns is to choose large-cap or hybrid mutual funds through a systematic investment plan (SIP), which may be more advantageous for them than purchasing individual equities in terms of future returns on the principal.
Small and mid-cap companies are more lucrative for investors willing to take on greater risks because they often multiply your initial investment in comparatively less time due to their smaller size. It should be mentioned that when we discuss these stocks, we are not referring to equities with cheap prices, but rather to their market capitalization. For instance, Vodafone Idea costs about Rs. 12 per share but it has a market valuation of 57,000 crore. On the other hand, Campus Activewear has a price of Rs. 290 but a market cap of just 8800 crore. Many people invest in these smaller businesses in the mistaken belief that they can buy more units of their stock, although the size of the purchase has no bearing on the transaction’s notional value. They frequently purchase these businesses on recommendations from others and without conducting any study. Due to their size, these stocks are often illiquid investments which make them susceptible to manipulation by operators.
Human greed or FOMO causes people to pay outrageous prices for these stocks, which subsequently results in significant losses. As a result, there is a fallacy that these stocks always result in capital depreciation. These businesses need to be carefully examined, and it is important to realize that the movements of these stocks are always cyclical. Due to their higher volatility or Beta, they beat large cap companies and the general market during bull runs but also decline just as quickly during bear runs. In order to predict how small and midcap stocks will behave in the future, it is also necessary to have a solid understanding of various industries.
Most notable successes of legendary investor Rakesh Jhunjhunwala – Twenty years ago, Titan had a market valuation of just 270 crore, and it is now worth 280,000 crore. Titan was a small cap stock that grew enormously!
In conclusion, small and mid-cap companies have the potential to offer prospects for exponential development while large-cap stocks offer stability and moderate returns. However, in order to successfully traverse these markets, careful study and a grasp of market dynamics are necessary.