Think stocks, not sectors, in smallcaps, says ace investor Shankar Sharma

In smallcaps, the sectors are yet to be fully formed, says Shankar Sharma

Investors must be cautious against picking smallcap stocks by sectoral themes, and rather take advantage of the wide range of opportunities on offer in this space, said ace smallcap investor Shankar Sharma.

In a conversation with Moneycontrol to welcome the new Samvat 2080, Sharma said he would advise against making sectoral investments as sectors are not fully developed among smallcap companies.

"I'm not a fan of that approach at all. I would caution against that. Because in smallcaps, the sectors are yet to be fully formed. They are not like largecap sectors, which are discrete and easy to identify," Sharma said.

Also Read: Why ace investor Shankar Sharma doesn’t buy large cap stocks

"If you get boxed into the current flavour of the season, like railways has been or defence has been, you have to be cautious. You can own maybe one or two. Don’t put most of your portfolio into sectoral plays in smallcap," he added.

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"The beauty of smallcaps is that it allows you to buy a very wide range of companies," Sharma said. Nifty Midcap 100 has advanced 25.3 percent in the past one year and Nifty Smallcap 100 has advanced 34.63 percent in the same period. Meanwhile, Nifty 50 has given 6.6 percent returns.

Sharma pointed out that sometimes one cannot put a smallcap company into a particular sector easily. "I just bought a company which is into marketing technology. We’ll call it mark-tech. They sell garments, they also manage marketing tech for a large online retailer through their algorithms. This is an interesting space to be in. What industry do I fit it into? Do I put it into garments, or tech, I don’t know. So I’m not getting boxed into all this," he said, citing an example.

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Shankar Sharma has a checklist for identifying small cap companies to invest in. "I look at the quality of the board -- that is of reasonable value. Tax payments are critical; companies that are paying tax are a decent bet. Those that also pay dividends even better," he explained.

"It’s not 100 percent foolproof. But back of the envelope, tax payments and dividend payments would ensure that the company is generating cash and not just accounting profits. That is a good enough reason to buy a small position in a company from a retail investor standpoint," he added.

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