Investing in small-caps? Direct investors should beware of valuation risks

Direct investors in small-cap stocks should book profits and wait for corrections, while those taking the fund route should invest with at least a 7-10 year horizon

Last week the BSE Small-cap Index touched a new high, crossing the 20,000 mark. Over the past year, small-cap stocks have rallied strongly, with this index giving a return of 53.22 per cent. However, valuations within this space have now risen to exorbitant levels. The Nifty Free Float Small-cap 100 Index is currently trading at a 12-month trailing price-to-earnings (P/E) ratio of  199.1, according to Bloomberg — almost four times the 10-year average P/E of 51.8. For investors investing either directly or via mutual funds, it is clearly time to take steps to safeguard themselves against a possible correction in