Managing Risks in Small-cap stocks

I was genuinely impressed by the cover story published in your previous issue, crisply emphasising on investment in small-cap stocks. As smallcap stocks carry high risk while delivering high returns, can you brief me as to how I can manage risks while reaping the benefits of investment in such stocks?

- V Narayanan

Editor Responds: Thank you for your kind words. Small-cap stocks are illiquid as compared to Large-Cap stocks. Moreover, they are vulnerable to market risk, making them highly volatile during a stock market correction. To be able to take a smooth investment decision and diversify risk, a good option can be investing in an index with strict selection and exclusion factors in order to manage risk. This inclines the investment approach more towards a passive approach, that relies on the market’s ability to identify niche high-performing stocks. The balance of the inclusion and exclusion factors helps to manage the risk of the index and create a more stable portfolio of small-caps. We hope we have been able to answer your query. Keep writing to us!