One of the reasons for retail investors to keep away from the market is the shock they received due to massive value erosion of some mid- and small-cap stocks.

The net worth slump, in several cases, was almost 100 per cent. Within a span of four years, many mid- and small-caps have turned penny stocks!

Several investors, who had bet on India’s growth story in 2008, suffered the worst.

Even investors who made systematic investments in these stocks are a dejected lot now.

The concept of buy-on-dips failed in most cases, as stock prices kept falling, making current prices much lower than the average buy prices.

Take, for an instance, the case of Suzlon Energy — one of the darlings of small investors, particularly the day trading community a few years ago. From a high of Rs 250 in 2008, the stock has tumbled to a low of Rs 7.5 and worryingly is still searching the bottom.

Several factors such as profitability erosion, pledging of shares by promoters, high interest rate environment, corporate governance issue, the Union Government’s policy paralysis and overall weak investment sentiment due to corruption allegations have siphoned off investors’ hard-earned money.

Espirito Santo Securities (in May) said the turmoil in mid and small-cap space was due to a “confluence of several technical and fundamental factors.”

So far, the BSE Small-cap index and the BSE-Midcap have underperformed by a whopping margin with respect to the BSE Sensex and the NSE Nifty.

Currently, the BSE Smallcap index is ruling 61 per cent below its all-time peak of 5,516.32, registered in January 2008. Similarly, the BSE Mid-cap index is 44 per cent behind its all-time high peak. In contrast, the BSE Sensex and the Nifty are just seven per cent away from the record level.

Now, baffled investors do not know what to do with these investments – whether to quit altogether or wait for the next bull cycle to get compensated for some of the losses?

Or should they indulge in cost-averaging?

Given the uncertain economic environment, with growth slowing down, experts feel the going may be tough for mid- and small-caps.

One of the golden rules of investment is that if a reason to buy a stock turns out to be wrong, it is better to accept the mistake and get out with a small loss. Instead, staying oncourse inevitably turns a small loss into a very big one.

It is better to rebalance and restructure according to the well-proven principles of asset allocation and fund management.

For those who want to restructure or rebalance their portfolio, investment gurus offer a few tips in identifying sound companies.

Those are: Focus on companies with sustainable earnings and solid cash flow; avoid stocks of lofty valuations; focus on stocks with above higher market-cap; avoid highly leveraged companies; and focus on companies with quality management.

badrinarayanan.ks@thehindu.co.in

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