SMID stocks outperformed Nifty over last 11 mths
Research shows 8x higher risk of capital loss in broader small-cap universe
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Based on trailing 12M P/E ratio, the Nifty Index is trading at 21.8x, Nifty Midcap 100 Index at 31x, while the Nifty Smallcap 100 Index is at 23.5x.
New Delhi: Research by DSP Mutual Fund shows an eight times higher risk of capital loss in the broader small-cap universe. Smaller firms can present a greater risk to investors looking for capital preservation. Historical data shows that a set of small-cap stocks with subpar fundamentals were eight times more likely to cause a permanent loss of capital to investors versus stocks from the Quality bucket, the report said.
Quality is defined as companies with better Return on Equities (ROEs), lower debt and lower variability of earnings. In fact, the Nifty Smallcap-250 Quality 50 Index has differentiated quality metrices. When a basket of ‘Quality universe’ firms is compared to the broader universe ‘ex of quality’, the quality firms have nearly double the RoEs and less than 2/3rd debt.
