It all began on 24th August 2016, the story of small cap stocks taking over the D-Street and turning out to be the new big bets in the market.

Valuation in this line looks stretched as compared to the large cap peers, increasing the risk level. While the PE for Nifty is placed at 24.45 and that of Sensex is at 20.84, PE of BSE Small cap Index is placed at 75.12 and that of Nifty Small Cap 100 is somewhere at 45.16.

This has got the investors nervous and yet this Index is tempting them like no other for they are still showing some space for growth. Moreover, the low interest rate environment has made the valuations in this Index lesser deadlier.

The Small Cap stocks are offering better upside and are offering good investment opportunities. The Index offers a larger area for making choices as they have overhauled the large cap stocks in numbers, hence offering better exposure to the consumer space.

The Yearly return Report:

The small caps on both the bourses have already doubled the investor's wealth in last one year. On BSE Sensex, the stocks like PS IT Infra, Tata Metaliks, Sudarshan Chemicals and Manapuram Finance have been taking the market by storm for past one year. While among NSE small 100 Manapuram Finance, GNFC, Godfrey Phillips and Balrampur chini have been stealing the limelight.

Nifty small 100 has given the return of around 28% in one year's time as against 18% as that of Nifty. One year return for Sensex is 16% which is way behind that of S&P BSE Small cap index that rose by 23%.

Some stocks might look expensive when compared with historical valuation, but there are plenty of growth opportunities here than in large caps.

The Catch:

Every too good to be true situation has a catch. This has too. The chances of immediate correction cannot be ruled out after such a sharp rally. But the long term investors can use it to their benefit for entering the quality stocks. Small cap stocks are often out of the line of attention of Institutional Investors. But as they grow bigger, they start receiving attention from them.

And if the promoters don't sell, a flow from the retail investors will be triggered who would look to sell some of their holdings, fuelling the rally further as the investments are entered by institutions.

Manapuram is leading the rally for the year. In past month some of the stocks have turned negative but of course that will be short lived. Last month, Escorts stayed ahead with India Cements, Delta Corp and Godfrey Phillips following close behind.

The gloomy ones:

Not all NSE small 100 stocks are going gaga in the rally. There are quite some bears among the bulls as well. These 15 small cap stocks have turned negative in a year's time.

Eros, and Inox wind have turned negative over 50%, while Marksans Pharma and Den networks are in 40% negative value. These stocks have looked not hopeful in even a week's time. So, no matter how shiny the small caps looks, it is always better to scroll through the past records before picking up the right gem.

Disclaimer: The contents of the article is sourced from the research report of Dynamic Levels with due permission. Dynamic Levels is a website owned by Dynamic Equities Pvt Limited, a member of BSE and NSE. You can visit Dynamic Levels by clicking: Dynamic Levels The article is not a solicitation to buy, sell in securities or other financial instruments. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and Dynamic Levels do not accept culpability for losses and/or damages arising based on information in this article.