“The recent micro cap fund NFO has generated a lot of interest in the mutual fund circles. I believe that we will have many micro cap schemes in the coming years- at least that’s the impression I got from my interactions,” says a mutual fund distributor who doesn’t want to be named. Motilal Oswal Mutual Fund launched Motilal Oswal Nifty Microcap 250 Index Fund in June. We don’t have the data on how much money the scheme got in the new fund offer or NFO.
“It is true that we may have some micro cap schemes in the coming days as investing in micro caps can be a very rewarding idea. But we don’t know whether the Sebi will create a new category called micro cap or whether fund houses will launch these schemes,” says Chokkalingam Palaniappan, Director of Prakala Wealth, a Chennai-based advisory firm. Currently there is no equity fund category called micro cap. Some small cap schemes used to call themselves micro cap schemes before the recategorisation of schemes by Sebi.
Why are these advisors excited about the idea of investing in micro cap stocks or schemes? Well, since these micro cap stocks are so tiny, they have the potential to make you very rich. However, you can also lose your money. That’s what makes them risky as well with huge potential to create wealth. Currently, the top 100 companies by market capitalization are called large cap companies. Companies that fall between 101 and 250 are called mid cap companies, those in the 251-500 bracket are called small cap companies. We don’t have a Sebi definition for micro cap companies.
However, you can consider them highly risky. That means you should consider investing in micro cap companies only if you have a very high tolerance for risk and volatility. You should also wait and watch to see how such schemes are performing before signing up.
“I don’t think index-based investing will work in the micro cap space. An active scheme may work better. But we still don’t know what Sebi is planning or what mutual funds are going to do,” says Chokkalingam.
