In an interview with CNBC-TV18, Ashwini Agarwal, co-founder and partner at Ashmore Investment Management India said that not all small cap stocks have poor balance sheets, bad cash flows, and are going to be hurt by the pandemic.

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Agarwal said these conditions could be true for many large cap stocks as well.

"This kind of narratives have built up over a period of time where investors have treated small caps as riskier assets. Yes, it could be true for a large number of names but it is not necessarily true for every stock," he said, adding that investors could take a more reasoned approach to these stocks, considering that valuations of large caps have already run up.

Agwarwal listed four factors he would consider in a small cap stock before looking to add it to his portfolio.

Edited excerpts from the interview:

"First is leadership. Does the business have some sort of a leadership edge that is sustainable? It could be a particular product category, it could be a particular niche market, it could be cost leadership of some nature which is sustainable but does the business have any sort of leadership.

Number two – is the balance sheet strong enough to sustain the beating that the pandemic will bring about? Everybody suffered. There are no exceptions barring maybe the pharmaceutical companies or the consumer staple companies everybody has suffered. So does the business have the balance sheet to sustain the downward swing in business fortune brought about by the pandemic?

Third: Does the business have a diversified revenue base between the domestic market and the export market? Given how things have panned out, my suspicion is that the export markets will recover a little bit earlier than the domestic market.

Last but not least – does the business have positive cash flows over the foreseeable future because that is a metric that everybody looks at."