The stock market’s recent bull run has ignited investor interest in nanocap stocks—companies with market capitalizations below ₹2,100 crore. A recent study by Aditya Birla Sun Life Mutual Fund highlights a stunning eightfold increase in individual investor holdings in nanocaps, soaring from ₹40,000 crore in June 2021 to ₹3.3 lakh crore by September 2024.
Nanocaps, often referred to as penny stocks, are ranked the lowest in terms of market capitalization, with 1,041 companies falling under this category. Despite their inherent risks and lack of mainstream analyst coverage, they’ve gained popularity among retail investors due to their potential for high returns.
The Numbers Speak:
According to the study:
- Retail ownership in nanocaps has surged from 20.2% to 25.2% between June 2021 and September 2024.
- Foreign Portfolio Investors (FPIs) have a limited presence in this segment, holding just 2.3% of nanocap stocks as of September 2024.
- Domestic Institutional Investors (DIIs) have also increased their stake slightly, rising from 3.14% to 3.84% over the same period.
Why the Hype?
Nanocaps offer opportunities that large-cap stocks can’t. They’re often undervalued, overlooked by institutional players, and trade at lower prices, making them accessible to retail investors. However, this comes with significant risks due to lower liquidity, volatility, and lack of governance in many cases.
Challenges and the Road Ahead:
While large-caps continue to attract steady flows, their growth has been slower compared to the meteoric rise of nanocaps. As of September 2024, large-cap AUM grew to ₹3.74 lakh crore from ₹1.94 lakh crore in June 2021—a testament to their more stable yet slower trajectory.
Financial advisors urge caution in chasing high returns in nanocaps. Wealth creation demands a balanced portfolio, blending the dynamism of small and micro-caps with the stability of larger, established companies.
For investors looking to tap into the nanocap wave, a prudent approach is key. Diversification and thorough research can mitigate some of the risks associated with these high-reward stocks.