Investing in Small-Caps? Know the Liquidity Risks Before You Leap

Recent analyses state that small-cap mutual funds in India are being forced to contend with improving market liquidity issues, primarily as a result of substantial investments into micro-cap stocks. These funds have increased exposure to micro-cap shares from 25% to 31%, while cutting small-cap stakes from 49% to 43%. This strategy is intended for micro-cap companies to grow but carries enormous liquidity risks, as these stocks are less traded and very difficult to liquidate in the face of market weakness. Investors should be encouraged to assess their risk tolerance and time horizon since liquidating investments can become problematic at times of heightened volatility in the markets. 

 

Source: MINT