With channels and newspapers reporting rise or fall in stock prices daily, it is often difficult to take the right call while investing. There have been times when good stocks, often referred to as value stocks, have been beaten down because of bad market conditions. On the contrary, small stocks gain on small news.
Take, for example, what happened to Kingfisher Airlines. The announcement of foreign direct investment in aviation saw the stock rallying 70-80 per cent. Though bad times for the company continue as more and more flights are being cancelled.
Says Sanjeev Zarbade, vice-president, private client group research at Kotak Securities, “There is a case for including smaller, beaten-down stocks in a portfolio as these may move up further if sentiments get better, and there is a cut in interest rates.”
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Others such as Out of City Travel Ventures has returned nearly 176 per cent in the last three months, United Breweries Holding 121 per cent, Man Industries 112 per cent, Symphony 109 per cent, Rasoya Proteins 104 per cent, Krishna Ventures 92 per cent and Bliss GVS Pharma 91 per cent.
These stocks jumped due to the ‘high growth’ phase in the stock market over the past week and improvement in investor sentiment, which in turn led to smaller investors buying many of these counters.
Financial experts say only surplus funds that you can afford to lose be put into risky instruments. So, the investments should be capped.
At the same time, all investors look for high growth. So, there is a part of your portfolio that can go in for high-risk-high-growth instruments, which can be a mix of large- and small-cap stocks, suggest experts.
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But, Zarbade advises retail investors should opt for companies backed by strong management, business model and robust cash flow. However, a handful of smaller stocks (three-five) can give a fillip to your portfolio. Being high beta stocks, smaller stocks have a huge upside, but yes, these have an equally big downside, too.
Therefore, for relative safety, Sunil Mishra, chief executive officer (CEO) of Karvy Private Wealth, says, “Choose value stocks in the mid-cap space instead. Importantly, you should have a high-risk appetite.”
Though most investors of smaller stocks plan their entry and exit on insider information, you can have a long-term approach towards these stocks, say one to two years. And this may be advisable for retail investors. For instance, Krishna Ventures has given 4,168 per cent returns in the past year, Aricent Infra 1,036 per cent, CCL International 880 per cent, Tuni Textile Mills 637 per cent and JRI Industries and Infrastructure 600 per cent.
But, there are certain things one should remember. Keep a track of these stocks more closely than say, an RIL or Infosys. Check the performance of the stock at least once in two days to see if there are any developments in the sector or the company. That will keep you informed and give you clues in case you need to exit midway. Don’t go by fundamentals of the stock — valuations or price-to-earnings ratio. A good technical analyst may be able to help better, but not always.
If you have made 50 per cent or even less profits within a few weeks, just exit the stock as the stock price can also crash. Like it happened, in the case of 3i Infotech, which rose from close to Rs 16 to nearly Rs 21 between February 1 and 21 after the corporate debt restructuring was approved for the company. But, since then it has been falling and today stands at a little over Rs 8. There isn’t much concrete information. There are only few research reports that will point you in the right direction. And you may not always get a buyer if you want to sell. And these stocks easily hit circuit filters, which impacts liquidity and restricts exit.