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Micro-Cap Schemes - Risky but Rewarding too Research Team | Posted On Monday, April 06,2009, 07:10 PM

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Micro-Cap Schemes - Risky but Rewarding too



DSP Merrill Lynch Mutual Fund's Micro Cap Fund is likely to inspire many replicas in the near future. "In all probability this is going to be the new topic. Fund houses are probably to lap it up," says an industry analyst.

As a result what is micro-cap scheme? Well, let us take a glance at how DSP ML Micro Cap really works? To commence with, the scheme will invest in stocks which are not part of the top 300 stocks.

The market capitalization of these stocks would be lower than Rs 1,500 crore. So is this a small-cap fund? Is it similar to Franklin Templeton's and Sundaram BNP Paribas' small-cap scheme? According to financial advisors, this scheme would be a lot more than "micro"-in other words, it would invest in even smaller companies. What do financial advisors consider about the scheme? "It could be a very hazardous proposition, as it invests in very small companies. But it also has the potential to present with quite higher returns. The reverse could also be equally true: "In a falling market you may undergo higher losses than in a large-cap or diversified scheme."

Accordingly, who can invest in a micro-cap scheme? Well, if you have the stomach for high risk, you can invest in the scheme. You should also have a longer time frame. But always try to make sure that you invest only a small part of your total equity investment, say 10%, in a micro-cap scheme.

Is it because of the amount of the risk involved? Yes, say financial consultants. They consider that it is not easy to identify potential winners among very small companies. The biggest problem is the flow of information. Transparency and reliability of the management is one more problem. The trouble is compounded when you have a large corpus. It will become extremely difficult to identify companies where you can park your funds.

All said and done, micro-cap is still excellent news for small investors, say investment experts. Think about it: how many times have you read about those ten-baggers recognized by some ace broker in Dalal Street?

You wished you could pick and choose one such stock, right? Well, this possibly will be your chance. This is for the reason that fund houses are far better equipped than an individual investor, when it comes to picking such scraps.

When a company primary comes to the market in its initial public offering, it can generate a great deal of interest from investors, making it an attractive time to invest, but in general, the question of how far it is safe to invest in a company at IPO will depend on the perception of its market value.

Characteristically, the IPO is the only time at which the share value of a business is fixed. A business has to go through a various number of steps prior to IPO to establish its long term security, and the launch price of the stock will be determined by economists and accountants in order to strike the best balance between the amount of money the business desires to raise, and its actual value, which relates to its assets and profit forecasts.

Because the market does not lay down the price of an IPO, it is a price that is subject to enormous fluctuations as soon as the shares go on sale. Depending on whether investors decide that a company is significance putting their money into or not, they will determine the direction that the share price takes over the first few periods of trading.

If a business is seen as a good threat, then the share price will rise above the IPO valuation as investors are drawn in, while if it is seen as being high-priced, then the value will fall as the stockholders are forced to lower their prices in order to sell their stock.It can be difficult to estimate whether a business will rise or fall in value at its IPO, although there are a number of indicators in the period running up to the date that can give you a tremendous insight into whether or not to get in early.

In the case of outsized businesses, their IPO will be a high profile event, which will inevitably attract a large number of institutional fund managers as well as smaller private investors to deposit their money into the business, and prices will tend to follow an upward trend in the first few sessions as the market value is attuned to meet the interests of the market forces.

The performance of smaller companies at IPO is much trickier to predict. If they are seen as being a well run and profitable business in a growth region such as telecommunications or technology, then they will generally rise in value for the first few sessions, in which case it is critical to get in early in order to get the best price and take advantage of the initial rises, whereas, a business that is seen as being in a stagnant industry with long term potential, but short term difficulties, it is advisable to wait for the price to fall before putting your money in to keep away from the initial drop in value.

On the whole, provided you are able to adopt a flexible and liquefied approach to investment, and can put money in at a time that suits you, as well as having the ability to get out at the right time, investing in an IPO need not be a high risk shift, and can offer significant rewards, on the other hand, this requires the ability to see beyond the marketing and recognize potential for growth and losses, as well as doing the research to back up your decision making process.

Proceeding while subscribing to an IPO

See whether there is a common consensus on the pricing of the issue. If you think the stock is steeply priced, it is healthier to wait for it to correct on listing. If the stock is extremely high priced, it would definitely accurate sharply when it gets listed. Buy the stock if you are convinced that it is a high-quality buy from the long term perspective at that price. Good companies with a reasonable price normally go up on listing. They tend to settle somewhere there for a period of time till the next result or any full-size news.

How can you find out if the company is worth investing in?

Find out whether the company has the best sustainable business model. What are its business prospects for the next coming two to three years? Are market conditions encouraging for the company? Buy the stock of a company which has continuing projects. When a company is entering market to fund its development programmed or finance its ongoing projects, it is always a excellent sign. It tells you that the company has enough experience doing the business and it will create more income once the project or expansion is over.

Lastly, what are the points one should keep in mind while entering the primary market? First of all, check whether the stock is profoundly priced. Two, check out whether the company has its order book in place. Three, make sure the company has a guaranteed flow of income.

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