By Joydeep Sen
There are thousands of stocks listed at the stock exchanges. The usually accepted broad categorisation is substantial cap, mid cap and compact cap, as per the total marketplace capitalisation of the listed providers. What is substantial and what is compact is a matter of debate, but for the mutual fund business, it has been defined by the Securities and Exchange Board of India (Sebi).
For mutual fund schemes, the prime one hundred providers as per marketplace cap are defined as substantial cap, the next 150 are defined as mid cap and the rest are compact cap. From your viewpoint, you may perhaps take exposure either by means of mutual funds, or purchase stocks straight by means of a broker. For mutual funds, you may perhaps be taking the inputs of an adviser / distributor and for direct stocks you may perhaps take the suggestions of a broker / advisor.
The general allocation in your portfolio must preferably be advised by a economic planner, or you may perhaps be performing it oneself. Similar to performing allocation to different investments such as equity, debt, gold, and so forth., inside equity you would be performing the allocation to substantial, mid and compact cap stocks. You have to modulate the exposure to MF schemes / direct stocks to optimise the allocation.
The nature of distinction
The substantial cap stocks have currently been found by the marketplace, which is why they are major. This is not a comment on the development prospective of a substantial cap business a substantial cap stock may perhaps or may perhaps not have prospective for cost appreciation, which time will inform. A fairly smaller sized business may perhaps have a greater prospective for development and cost appreciation, becoming in the early stage. However, if the small business is however to get essential mass, the threat also is greater. Net-net, compact cap stocks have fairly greater threat and fairly greater development prospective than substantial cap ones.
To look at some information on what we are speaking about, we have taken the Nifty 50 index to represent substantial cap stocks and Nifty Smallcap one hundred index for compact cap stocks. In the severely volatile phase of January to March 2020, the fall from peak to trough will give an indication, which is technically identified as drawdown. Nifty 50 index, from the peak of January 14, 2020 to the bottom of March 23, 2020, fell by 38.4%. In the related period, Nifty Smallcap index, from the peak of January 27, 2020 to the trough on March 24, 2020, had a drawdown of 47.4%.
This is an instance of what we had referred to as greater volatility. Now coming to the prospective, from the bottom on March 23, 2020 till June 30, 2021, Nifty 50 gained 77%. The losses of January to March 2020 have been wiped off and investors have earned handsome returns. As against this, from the bottom on March 24, 2020 till June 30, 2021, Nifty Smallcap index has delivered 132%. Usually, when the economy is recovering from a slowdown, substantial cap ones recover more rapidly as the resilience is greater.
This time, in the phase of recovery from the pandemic and lockdown, some thing else is taking place. Probably the formal sector, the listed stocks, have gained at the price of the even smaller sized ones, the unlisted micro, compact and medium enterprises (MSMEs) who are facing higher troubles.
Conclusion
There are various views on the development prospective of substantial and compact cap segments. The numbers show that compact cap has fairly greater prospective on each sides, i.e., upside and downside. You may perhaps do the allocation in your portfolio accordingly. In the compact cap space, the universe of stocks becoming substantial with so a lot of much less-found providers, stock selecting expertise are more relevant than in the substantial cap segment.
The writer is a corporate trainer (debt markets) and an author