Mid & Small Cap Stock in India | (Methodology Document)

Introduction

With Yadnya’s Mid & Small Cap Model portfolio, what we are offering is a portfolio built using Yadnya’s FIVE-G framework. The idea is to find out companies that have the potential to grow and become the next large caps.

After the big hiccup faced in 2017 NBFC crisis, small and mid-cap stocks took a huge beating. However, looking at the push by the government for “Aatmnirbhar Bharat” & “Vocal for Local”, we see small and mid-cap stock coming back to life again. Moreover, global prevalence of COVID induced anti-China sentiment is providing an opportunity for India to prove itself, thus the small and midcap market is abuzz again.

Stock Selection Approach

For portfolio construction, this Model Portfolio uses Yadnya’s FIVE G framework

F – Financials

I – Industry

V – Valuation

E – Enterprise

G – Governance

We consider many fundamental, technical, industry parameters for coming up with individual scores of all the companies in the screened universe of stocks. Some of these parameters are mentioned here:

Based on the individual scores, companies are ranked within their respective sectors. Then we do tactical sector allocation and the top ranked companies within those sectors are picked for constructing the portfolio.

Investment objective

The aim is to generate long term returns by investing into mid and small cap companies with growth potential.

Strategy

Buy and Hold investments with a time horizon of 10 years in mid & small cap stocks with strong fundamental characteristics and sound management.

Methodology

Risk mitigation strategy

We actively consider risk parameters like Beta and Standard Deviation in our analysis. Incorporating these parameters help in constructing portfolios with limited downside risk. Thus, if the benchmark stocks take a steep fall, the constructed model portfolio falls at a lesser pace and quantum. One of the criteria for selecting stocks is that after constructing the portfolio, Beta and Standard Deviation of the constructed portfolio is less than Beta and Standard Deviation of the benchmark.

Tactical Sectorial Allocation

Exit Strategy

A peculiar thing with mid cap stocks that are as per AMFI classification ranked from 101 to 120 is their jumpiness to large cap category. There is a remarkably high probability of them moving to the large cap category and then coming back to the same levels. Due to market movements and positive news, they may jump to large cap, for such stocks, we will wait and watch for some time if the leap looks permanent or if it is a temporary jump. If the stock rockets to NIFTY 50, then for sure we will exit the stock from this portfo