Sood said expectations of earnings growth is high but many of the small-cap stocks are at the upper end of the valuation band.
“Even if earnings deliver as it is expected in the next couple of years, small stocks may not perform because of the rich valuations,” he said.
The small-cap index comprising 848 stock is trading at a trailing price to earnings ratio of 111 times — its highest ever.
Sood said the crash in the stock market in 2008 had left investors mainly in several small-cap stocks high and dry. “Smallcap stocks are cyclical in nature. For example, it rallied between 2003 and 2007 and then they saw a significant correction. It took almost 10 years for investors to recoup the losses“
We want our investors to be shielded as much as possible. After 2-3 years, we may realise that exiting small caps is a good decision.