12th May 2010

The BSE Small-cap index has gained 142% over the past 15 months, compared to a 116% rise in the BSE Mid-cap and a 77% increase in the Sensex.

Foreign institutional investors (FIIs) holding in small-cap companies have risen 5-25% over the past two quarters on expectations that many of these companies have the potential to become blue chips for some years.

FIIs have significantly raised their shareholding in companies like Su-Raj Diamonds, Radico Khaitan, Jai Balaji Industries, eClerx Services and Sundaram Multi over the past two quarters.

According to market experts, though share prices of small and mid-cap companies are no longer cheap, but the rally in these stocks could continue for a while.

Smaller foreign funds are investing in small-cap stocks. Small-cap stocks allow foreign funds to buy chunky holdings, like about a 3-4% stake in a company at one go because these companies are relatively under owned.

Investors can follow the lead given by FII's in picking small cap stocks. The holding period of investment in these stocks should be at least a year or more.