SMSF investors are turning to small-cap stocks: Should you?

Self-managed super fund (SMSF) investors are no longer only buying blue-chip stocks and concentrating their portfolio holdings within the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO). According to the Australian Financial Review recent research by Investment Trends suggests one-fifth “of SMSF trustees plan to invest in small-cap or speculative shares in the next 12 months.”

It would appear that SMSFS are expanding their reach into small-cap stocks to capture some of the very high dividend yields on offer and the relatively attractive valuations.

It’s not really a surprise considering the access to information which is now available for SMSFs to utilise. This access coupled with some of the astronomical share price gains achieved by the likes of small companies such as Nearmap Ltd (ASX: NEA) has no doubt heightened investor enthusiasm for the sector.

Nearmap’s gains have been thanks to its cutting edge online aerial photomapping products which are gaining traction amongst an array of customers including insurers. All this has helped send the firm’s share price rocketing over 1,200% in the past two years and pushed its market capitalisation to $142 million. There are plenty of other examples of small stocks which like Nearmap have provided big returns for investors.

The ten-bagger

A ten-bagger stock refers to a share price that increases by a multiple of ten. Some might consider this the holy grail of investing. These types of gains are unlikely amongst large established blue-chip stocks but they are certainly possible in the small-cap space.

Of course picking winners is no easy task. One small-cap currently popular with some institutional investors is eServGlobal Limited (ASX: ESV). eServGlobal’s market capitalisation is $180 million which places it squarely in the small-cap space. The company provides mobile money solutions and has built up a significant presence in Africa and Asia. There is the potential for strong growth as customers increasingly look to access and transfer cash across countries and continents. The share price has increased by around 280% in the past two years but if the company’s products continue to gain traction there could be plenty more growth ahead for shareholders.

A great little stock to buy right now

It's not too late, there are a number of enticing small-cap stocks available to buy right now! The Motley Fool has issued a firm "BUY" rating on this small but ultra promising ASX company... and you can get the name and code FREE right now. Click here for your free copy of "The Motley Fool's Top Stock for 2014."

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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