Small Cap vs Micro Cap: Which is Better for Investment: If we compare the Nifty Micro Cap 250 Index, which has given more than 60 percent returns in the last one year, and the Small Cap Index (Nifty Small Cap 250 Index), which has given about 53 percent profit during the same period, which one would you consider better? If the decision has to be made only on the basis of returns, then most people may be inclined towards the Micro Cap Index which gives better returns. But will it be right to do so? We will talk about this question later, but first let us see what have been the returns of both of these in the last 1, 3, 5 and 10 years. Let us also tell you that the stocks of those companies are included in Small Cap, whose rank is from 251 to 500 in terms of market capitalization. On the other hand, companies ranked 501 to 750 on the basis of market cap are included in Micro Cap.
Micro cap vs Small cap: Historical returns data
Nifty Small Cap 250 Index 1 Year Return: 53.1%
Nifty Micro Cap 250 Index 1 Year Return: 60.4%
3-year return of Nifty Small Cap 250 Index: 26%
Nifty Micro Cap 250 Index 3-year return: 37.4%
Nifty Small Cap 250 Index 5-year return: 31.8%
5-year return of Nifty Micro Cap 250 Index: 42%
10-year return of Nifty Small Cap 250 Index: 16.1%
10-year return of Nifty Micro Cap 250 Index: 22.2%
(Source: NSE, updated data till 12 September 2024)
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Pay attention to the risk, not just the return
It is clear from the above data that the average annual return of Nifty Micro Cap 250 Index has been much higher than Nifty Small Cap 250 Index not only in 1 year but also during the period of 3 years, 5 years and 10 years. But is it enough to just look at the return figures before deciding to invest? If you are a smart investor, then you will not forget to look at the risk along with the return.
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High risk is associated with high returns
The possibility of high returns in both small cap and micro cap is considered to be higher than that in large cap and mid cap stocks. But the risk on investment in both categories is also high. Especially micro cap stocks are considered to be much more risky than small cap. There are some special reasons for this:
1. Lack of liquidity:Transactions in micro-cap companies are low, which can make it difficult to buy and sell shares. This lack of liquidity can lead to volatility in stock prices, which can negatively impact investments.
2. Risk related to the future of companies:Many micro cap companies do not survive in the market for long. According to a report, in the last 5 years, more than 50% of the companies included in the micro cap index have slipped down in ranking due to poor performance.
3. Tracking error:Currently, there is only one index fund in the Indian market that tracks a micro-cap index, and due to limited liquidity, the tracking error is high. This means that there can be a big difference between the returns of the fund and the returns of the index.
4. High volatility:Micro cap stocks have high volatility. Their returns can fluctuate significantly. On the basis of standard deviation, the volatility of the micro cap index is much higher than that of small caps.
5. Fear of negative returns: While the micro cap index has given better returns overall in the five years, its returns have been negative 10.2% of the time during this period. This ratio of negative returns is higher than other indices like small cap or Nifty 500. This means that during a market downturn, the loss in this index is likely to be higher than other indices.
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Why are small caps better than micro caps?
- Better Stability:Small cap stocks are more stable than micro caps and have less volatility.
- low risk: The size of small cap companies is bigger than micro cap companies, hence their ability to withstand market fluctuations is also higher than micro cap companies. This is the reason why the risk of decline in them is less.
- Reduced tracking error: Funds tracking small-cap indices have less tracking error issues than micro-cap indices.
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Who is better for investment?
If you expect high returns and have the ability to bear risk, then micro cap stocks may seem attractive to you. But before investing, it is also important to pay attention to the heavy risks associated with them. The truth is that small cap stocks are also considered to be very risky compared to large cap and mid cap. Therefore, retail investors are advised to keep small cap stocks in their portfolio as well. In this regard, it is better if they stay away from micro caps. Investors who want to invest in micro caps for high returns even after knowing the high risk should invest in such small cap funds, which also include some micro cap stocks in their portfolio. Overall, investing in micro caps can be very risky for retail investors. Do not decide to invest in micro caps based on hearsay. If you have any confusion about this, seek the advice of your investment advisor.
