Be careful with small cap stocks!

Investors need to be careful in this market phase when every small-cap or mid-cap story is at cheap or reasonable valuations. Investors are ignoring potential risks that could arise from multiple factors; disruption, more competition, sudden fall in demand, change in regulations. Fund managers are cautious as corrections in mid or small cap have been painful. Investors chasing momentum make lumpsum investments and are the first ones to redeem when market corrects. This poses a problem for fund managers. Small caps are not very liquid meaning these stocks are not easy to buy or sell in large quantities. When faced with huge redemptions, fund managers will have to sell the best stocks in their portfolio because only those will take finders in a falling market. So, it is a double whammy where you sell your good stocks and are left with the not-so-good ones.