The recent bouts of volatility has hit small cap schemes very hard.The small cap category has lost around 9% in this year till date.The category is down around 7.91% in the last three months.However, the small cap category is still in the positive territory in the last one year.The category has earned around 28% in the last one year.It clearly shows small cap schemes may face rough weather but they have the potential to offer superior returns if you have the patience and ability to tolerate volatility.You might be wondering why investing in small cap schemes is risky.Well, small cap schemes invest in very small companies or their stocks.
These companies go through many ups and downs more than established companies in the large and mid cap segments.Under Sebi's mandate, small-cap programs must invest in companies with a market cap below 250. These programs must also invest at least 65% in small-cap stocks. It's not easy to identify winners in the small-cap segment. Many of these companies are well known. They are also under-researched. Their management can be unscrupulous and they can make high claims that can be untenable. Sometimes the management together with market operators can inflate the prices. These are some of the reasons why the market disproportionately rewards and penalizes these companies. If these companies are successful, the market will be behind these stocks and investors will suddenly have multibaggers in their portfolios. Should they fail, however, the deeds would be severely punished.Stocks can become absolutely worthless overnight. In short, investing in small-cap stocks isn't a piece of cake. You need to find successful fund managers who specialize in small-cap stocks. You should also pay attention to how the systems performed during the market downturn.
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