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    Looking at smallcap stocks? Make a difference between the desire to buy and logic to own

    Synopsis

    Knowing what is risky and managing those risks are two different things. Knowing risk is easy, but managing the risk is more complicated than it appears. If one has not learnt this lesson in the month of March, then probably he or she needs to seriously think about whether they should invest in stocks or not. At the start of March it was well known that valuations are high so it is risky to invest in small caps. But when the fall happened, how many were able to manage the risk of investing in small caps by hedging with selling nifty futures or any other way. Probably, not many. The fact is that the old theory of taking a short position in nifty futures or buy put options to hedge your portfolio works in large caps that too only if your portfolio selects large caps. In case of small caps, the only way to manage risk is to avoid the risk by not buying bad quality stocks which are flying high due to a narrative on the street.

    If market breadth improves further than once again, the “desire to own small cap stocks” would overtake the “ logic to own small cap stocks”. The ways markets have shaped up in last four trading session, it appears that bulls will be back in reckoning in all segment of the markets, The made their come back with one index heavyweight moving upward then followed by select large cap, in last two days, midcap stock and if things remain as they are
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    The Economic Times