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Where to invest to maximise your returns? Are large- cap companies the answer, or are mid and small cap companies the potential gold mine? Dinesh Thakkar tries to answer the perennial investor dilemma.
The stock market is synonymous with wealth creation and maximisation. So, for the purposes of this topic, I would like to confine myself to one criteria – market capitalization of the company. Selecting companies based on mcap is not easy: here one has to bear in mind that companies achieve size and scale only over a period of time. Thus, we can conclude that companies of a larger scale have been operating for several years and have weathered rising and falling markets and fluctuating economic cycles. In contrast to this, mid and small-cap companies would have relatively lesser experience.
Apart from this, most large-cap companies have an established track record of earnings because of their loyal base of consumers supporting their products, stronger balance sheets and cash flows and better credit ratings because of their market standing. In most cases, they also have a competitive advantage in the marketplace because of better cost controls, strong marketing capabilities, and so forth. In contrast to this, the non-large-cap companies not only have to compete on a much stronger level to sustain their market position, but they are also subject to higher risks generated by fluctuating industry cycles.
While large-cap companies have several advantages, their smaller or newer peers often have the advantage of greater potential growth prospects, as there is a greater possibility that these companies can double their revenues and profits over the next few years. Finding such companies may require a lot of research, and investing in them may also require insights into the way the company works, its long-term goals, and the mechanics of the stock market. Thus, the determination of one’s risk profile becomes an important element, and you should avoid such involvement if you are not a professional.
To conclude, investing is all about maximizing wealth (the relatively risk-free way) by investing in safe, potentially profitable corporates with a good reputation, a proven track record, and a future that seems assured. India is a land of constant new opportunities which are emerging as a result of the progressive growth of our economy, and the opening up of new avenues of business in the corporate sector. If we indeed have to put value on future opportunities, the sum would run into crores and crores of rupees, but to seize and realize these opportunities, corporates should be able to raise huge capital. They must also be capable of creating the right business model to generate profits from it. Who else than a big corporate house having large scale and size to be able to do this?
Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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