Fund managers of small-cap mutual funds have recently been focusing more on exploring the potential of micro-cap stocks, going beyond their traditional small-cap allocations. According to ACEMF data, the allocation to micro-cap stocks within small-cap funds has increased significantly from 25 per cent in January 2024 to 31 per cent in January 2025. This shift has been accompanied by a decrease in the share of small-cap stocks, which fell from 49 per cent to 43 per cent during the same period.
Despite the higher risks associated with micro-cap stocks, such as volatility and limited liquidity, small-cap fund managers are drawn to this segment due to the opportunities it presents for deploying their funds efficiently. There are no strict regulations limiting small-cap funds from investing in micro-cap stocks, allowing them to explore further down the market cap ladder.
The micro-cap universe in India has seen substantial growth in recent years, driven by factors like enhanced liquidity and improved market infrastructure. The post-COVID equity market rally has also boosted the appeal of micro-cap stocks among investors. The market capitalization threshold for micro-cap stocks has increased significantly, presenting new opportunities for small-cap fund managers to diversify their portfolios and potentially generate alpha.
Despite the opportunities, investing in micro-cap stocks remains high-risk due to factors like lower liquidity, higher volatility, and governance issues. Retail investors are advised to conduct thorough due diligence to avoid potential pitfalls such as price manipulation or fraudulent practices.
Overall, the increasing allocation to micro-cap stocks in small-cap mutual funds reflects the evolving investment landscape and the pursuit of new opportunities in the market. It is essential for investors to stay informed and cautious when venturing into these riskier segments of the market.
