5 Ways to Minimise The Risks When Investing in Small-Cap Funds

Since January 15, 2018, the BSE small-cap index has lost nearly 19%. Hence, it is quite natural to ask questions like:

• Is it too late to make up for the fictitious loss?
• Is it still possible to hedge?
• Should you increase or decrease your investment portfolio?

This article will talk about how you can treat market volatility and protect yourself from future market shocks.

1. Reorganise to include tried-and-tested names

Similarly, there is a slew of tried-and-tested names in the small-cap space that have delivered solid returns in recent years.

If an investor believes that his or her shortlisted investment may go haywire during turbulent times, he or she should consider investing in these funds.

2. Maintain discipline and stick to the plan

You have the right perspective when you enter the small-cap segment.

Here, having the right perspective means having a well-defined objective and doing your homework on the fund’s stocks, the fund manager’s experience, the fund’s tenure, risk metrics, and so on.

You should also make sure that your portfolio is not overly aggressive in general and that your portfolio is not too conservative if you have a long-term goal.

If your overall equity allocation is 75% of your total assets, you can divide your investments into 30% large-cap, 30% mid-cap and 15% small-cap.

3. Expand in an organised way

Adopting a phased strategy, also known as a Systematic Investment Plan (SIP) approach, is one of the safest ways to protect against small-cap volatility.

We are confident that you are aware of SIP and its advantages. Buying in small quantities but regularly allows you to expand faster.

4. Diversify your portfolio

It’s appropriate to forego 1% returns from a portfolio if you can save an extra 1% in a bear market. A better strategy is to diversify your portfolio and spread your small-cap risk.

If you spend more than Rs 15,000 per month in small-cap funds, it’s a smart idea to select three funds with separate risk indicators and up-market and down-market capture.

The strategy will help you lower your overall risk in small caps while also allowing you to restructure and re-allocate a small portion of your small-cap portfolio as required.

5. Stay in your comfort zone while investing in small caps

When investing in small-cap funds, it’s important to create a safety net for yourself.

Every investor has a specific area of expertise. For example, if you work in the steel industry, your basic understanding of the steel industry will be much greater, which will benefit you. You’ll be able to tell when steel firms are doing well and when they are not. 

Sticking to your circle of competence is the safest hedge in these uncertain times. It not only lowers your risk but also aids in the identification of interesting purchasing opportunities.