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<\/p>\nAt a time when investors are preferring higher-risk investment products like thematic and small-cap mutual fund (MF) schemes, some fund houses are exploring the possibility of going further down the market-capitalisation (m-cap) ladder to unearth newer investment opportunities.<\/p>\n
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HDFC MF had filed papers with the capital markets regulator — the Securities and Exchange Board of India (Sebi) — earlier this year for an active micro-cap scheme.<\/p>\n
Some more fund houses are keen on launching such schemes, say industry observers.<\/p>\n
In general, a stock is considered to be a micro-cap if it is ranked below 500 in terms of full m-cap in the listed equity space or if its m-cap is below Rs 1,000 crore.<\/p>\n
A micro-cap scheme makes sense if past performance of the Nifty Microcap 250 Index is taken into consideration.<\/p>\n
The index has delivered an annualised return of 56 per cent in three years.<\/p>\n
By comparison, the large-cap National Stock Exchange Nifty50 has delivered a compound annual growth rate (CAGR) return of 21 per cent.<\/p>\n
Over 10 years, the micro-cap index (23 per cent CAGR) has delivered nearly twice the return of the Nifty50 (11.3 per cent CAGR), reveals Bloomberg data.<\/p>\n
Irrespective of the strong performance over the years, experts find the micro-cap space fraught with risks, mostly due to the non-availability of enough information for a comprehensive analysis and lower corporate governance standards at smaller companies.<\/p>\n
Analyst coverage on stocks ranked below 500 in terms of m-cap is also rare.<\/p>\n
Moreover, liquidity is generally low for such companies.<\/p>\n
“Micro-caps are only a small part of the equity market. Large-caps alone account for about 66 per cent of the total m-cap and micro-caps only about 3 per cent.<\/p>\n
“We did some research last month and it shows that the average analyst coverage in the small-cap and micro-cap universe is less than two.<\/p>\n
“Overall, the micro-cap space is a very under-researched segment,” says Pratik Oswal, president-passive funds, Motilal Oswal Asset Management Company.<\/p>\n
Analysing and constantly tracking the large universe of micro-cap companies is the biggest challenge in managing a micro-cap fund, especially when there are strict limits on fund management fee as in the case of MFs, according to experts.<\/p>\n
Given this limitation, micro-cap stocks are estimated to account for just about 4 per cent of the total assets under management with MFs, most of which are through small-cap schemes.<\/p>\n
At present, investors wanting higher micro-cap exposure have some options through portfolio management services and smallcase, apart from direct investment in stocks.<\/p>\n
Vishal Dhawan, founder, PlanAhead Wealth Advisors, says an MF offering in the micro-cap space could be helpful for certain investors.<\/p>\n
“A lot of investors tend to invest in micro-cap stocks and they would be better off doing it through MFs, which would be well diversified.<\/p>\n
“This is a risky space but investors have a time horizon of over 10 years and the ability to remain unfazed by extreme volatility,” he says.<\/p>\n
On the strong performance of the micro-cap index, Oswal highlights the risk resulting from the cyclical nature of the dominant sectors in this space.<\/p>\n
“In the index, industrials and consumer discretionary have the highest weight. Both these sectors are cyclical.<\/p>\n
“The performance is also a function of optimism in the market as in the case of small-caps,” he says, adding that the micro-cap index is 30-40 per cent more volatile, compared to the Nifty50.<\/p>\n
Abhishek Banerjee, founder, LotusDew, says his micro-cap portfolio for clients works on a strategy that focuses on ‘non-balance sheet’ value indicators to identify the right companies.<\/p>\n
“The reputation of the promoter and top management is what we keenly track.<\/p>\n
“It’s a very expensive asset that has been built over its lifetime.<\/p>\n
“Another important thing is how new the product or solution is.<\/p>\n
“Any space which already has larger companies is a tough space to crack for newer ones,” he adds.<\/p>\n