“Catch them young!”. An evergreen slogan that applies to every aspect of our lives. In investing too, it makes a lot of sense to catch companies when they are very young and to stay the course with them throughout their extended growth phase.

To catch a company young, the best approach would naturally be to buy them when they are small. But, today’s smallcap universe has very large companies and they trade at elevated valuations. The average market cap of several smallcap portfolios is above ₹2500 cr. So investors are going further down the curve to buy these companies when they are SMEs. But, the problem with this approach is the difference between the disclosure needs of companies listed on the SME segment and the main board of the stock exchange.

Compliance and regulatory requirements for SMEs are far lesser and this alone represents significantly higher risks to investors. Investors are overlooking this critical aspect and flocking to buy SME stocks. The herd is trending to buy SMEs and this has distorted SME valuations significantly.

Huge oversubscription of IPOs shows the extent of frenzy in this space. We are also hearing stories of wrongdoings in SME stocks. Market manipulation, rampant oversubscription and mob investing are very evident in this space. When we see such frenzy, the safe approach would be to steer clear of this space. But, seeing the investor mood, it seems nobody wants to leave the party and more people are queuing up to get in somehow.

We need to see how things play out from here and caution is the absolute watch word.

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