Do Microcaps Mean Volatile, Uncertain Returns? Not Always

Investors in India's micro-cap story bagged stellar returns, while also defying the general perception of volatility in this segment compared to its larger peers in the long-term horizon.A gauge for companies listed under the small and medium enterprise segment in the NSE's Emerge platform — NSE SME Emerge — has surged over 1,200% since November 2017, while the Nifty 50 rose about 120%. Investors pocketed the multifold surge in these companies in a much safer and less volatile run than what was seen in the benchmark Nifty.The standard deviation of daily returns — one of the measures that helps determine market volatility — was about 0.009 for the SME Emerge since November 2017, while it was higher at about 0.01 for the Nifty, according to an analysis by NDTV Profit.A relatively stable surge in the long run comes at a time when the markets are afraid of correction in the segment. Earlier this year, the Securities and Exchange Board of India warned participants of froth build-up in the market.Retail investors have the wrong perception of the SMEs being riskier due to a lack of detailed research and awareness, according to Yash Bhanushali, fund manager at StepTrade Share Services Pvt. "The SMEs have a huge potential and generate better returns over a long-term period. So, the SMEs are less risky if investors invest with proper research and accurate data."But, solely based on historical returns and volatility, one cannot conclude that large companies are riskier than the SMEs. This is because the data availability for the SME stocks is limited and stock volatility is just one among the many risks involved, according to Vaibhav Porwal, co-founder of investment management provider Dezerv."Thus, an ideal approach would be to analyse each company for all the types of risk for a long period of time to understand the risks involved. But, overall, one should continue to treat the SMEs as riskier and tread with caution, especially in an overheated market," Porwal said.The beta for the SMEs will also be less if the investment is held for a longer horizon, Bhanushali said. “The factsheet of NSE Emerge shows that the beta of SMEs is 0.28 if compared to Nifty 50 for a period of five years.” A beta less than 1.0 indicates lower volatility in the market. The beta for the Nifty Next 50 is about 0.85% in the last five years. ."One should also note that statistical measures like volatility and beta are not constant, they can change significantly in the future," Porwal said.The SME Emerge has also reported a lower beta when compared with the mid- and small-cap benchmarks for a period of five years..Valuation Deep Dive: Are Indian Equities Priced Beyond Perfection?.The Nifty SME Emerge index, with 245 companies in the index, is the benchmark for small and medium enterprises that are listed on the NSE Emerge. The combined market capitalisation of companies listed in the index stands at Rs 9,670 crore, according to Cogencis data. Among the constituents in the index, capital goods companies have the highest weight of 22.11% followed by tech and healthcare stocks. Companies like Network People Services Technologies Ltd. and Jeena Sikho Lifecare Ltd. have the highest weightage in the index. .The surge in the index can be attributed to inclusive government policies, and ease of access to finance and technology, according to Bhanushali. "International markets are accessible due to improved technology and advanced software, improved logistics and digital commerce." The surge in the segment will only continue as more and more investors are participating in the SMEs, Bhanushali said "Daily volumes in the SME market have reached to Rs 500 crore as compared to just Rs 50 crore in 2018."Purely from a valuation perspective, the SMEs are expensive and have seen multiple times in history that bubbles form and burst periodically, Porwal said. "The surge can continue for some more time, but if the SME companies fail to achieve earnings growth and visibility of earnings growth, it will become increasingly difficult to sustain these valuations.".Mutual Funds See Highest-Ever Inflows In April, SIPs Continue Record Streak

Do Microcaps Mean Volatile, Uncertain Returns? Not Always

The NSE SME Emerge has also reported a lower beta when compared with the mid- and small-cap benchmarks for a period of five years.

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