5 Ways To Hedge Against A Small-Cap Crash

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  • 26 Apr 2023

Performance of small-cap stocks has been bleak recently. Since the Union Budget:

a) Nifty lost around 4%

b) Mid-cap index lost around 4%

c) Small-cap index lost nearly 16%

Here are 5 ways you can hedge your portfolio:

1) Minimize Investment Weightage:

  • Overall weight of small-caps in portfolio should be less than 25%

  • Invest 75% of funds in large-caps

  • This can protect against market volatility

2) Restructure Your Portfolio:

  • Small-caps are riskier than large-caps

  • But in small-caps too, there may be well-known, tried-and-tested options

  • During market uncertainty, select these stocks instead of unknown risky stocks

3) Diversify:

  • In the small-cap segment, any stock can fail

  • That’s why invest in at least 10 companies to hedge against loss

  • Invest equally in all these stocks

  • This way, you can ensure that not all stocks perform poorly

  1. Have A Long-Term View:
  • Invest in small-mid cap companies with a long term approach

  • Identify financial goals you want to achieve in 5-10+ years and invest towards them

  • Avoid debt-burdened companies

  • Invest fixed portion of total corpus for mid-caps

  • Remain invested till the stock is not growing more than 4 times

5) Invest Where You Are Competent:

  • There are a lot of industries in the small-cap segment

  • Steel, pharma, mining or agriculture, for example

  • Do you have in-depth knowledge about any industry?

  • Invest in small-cap stocks of that industry

  • This can reduce your risk and increase your investment competence

The Bottom Line

Small-caps are generally riskier than other segments. In times of volatility, there are chances of losing money. But, they have the potential to offer high returns with sensible money management. So, hedge your investments to try and minimize losses.

Looking for investment ideas? Get our latest research reports here. Or learn about the stock market at Kotak University.

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