Large cap funds are considered safest, small-caps are among the riskiest, while mid-caps lie somewhere between the two. Those who are keen to protect their capital opt for the large cap funds. Conversely, investors who want exceptional gains usually do not take this path.
Investing in mid-cap funds, however, is seen as one of the practicable, although risky, alternatives for long-term wealth generation, say wealth advisors.
We spoke to a number of advisors and mutual fund experts to dwell on this. And we discovered that there is a broader consensus among most of them on the fact that mid-caps stocks are volatile, offer greater scope of earning big gains but the selection of right stocks is nothing less than a challenge.
Since mid-caps are under-researched, they offer a wider scope of wealth generation. Also, thanks to volatility, these stocks are meant for long-term investors and not for the faint-hearted and conservative ones.
There are 26 mutual fund schemes and these schemes saw an inflow of ₹1,244 crore in the month of July, according to the latest AMFI (Association of Mutual Funds in India) data. Total net assets under management (AUM) of mid cap funds were ₹1.68 lakh crore as on July 31, 2022, the data shows.
According to Value Research data, mid-caps have given 18.6 percent annualised returns in the past 10 years, while large cap and flexi cap funds have delivered 13.5 percent and 14.7 percent returns, respectively.
“Mid-caps tend to outperform the large cap funds in the long run. In fact, some of today's mid-caps will become tomorrow’s large caps. So, their returns are usually higher. If you look at the past 10-year returns, most mid cap funds delivered anywhere between 15-20 percent. But investors should be careful about investing in them for a short period. One should look at a seven-year horizon while investing in mid-caps,” said Sridharan Sundaram, Founder of Wealth Ladder Direct.
About their current valuation, Mr Sundaram says that the price/ earnings (P/E) ratio of mid cap stocks is in the range of 18-30 as of now. On the other hand, P/E range of large cap stocks is between 22 to 35. So, one can say that they are available at relatively attractive prices.
Under-researched stocks
One of the key factors that set mid cap stocks apart from the large cap stocks is that they are under-researched and hence, they offer a huge scope to investors to do the ‘smart’ stock-picking.
Prateek Pant, Chief Business Officer, WhiteOak Capital Asset Management Company, says “While alpha generating opportunities are present across the market cap spectrum, the SMID (small & mid) segment of the Indian equity market is particularly fertile for idea generation and bottom-up stock-picking, given that it is relatively more inefficient and under-research as compared to the large cap segment.”
While echoing the similar sentiments, Abhishek Dev, Co-Founder and CEO at Epsilon Money Mart, says, “Given mid-caps are relatively less researched as compared to large caps and do have lower market liquidity (which contributes to the volatility) stock picking and alpha generation opportunities and loss risks are also higher than large and mega caps. Hence what is important that you carefully choose mid cap funds which are managed with a disciplined and consistent process, and have proven track record across market cycles and buy them with a longer time horizon (ideally 5 years plus).”
Greater volatility
There is an investment maxim that says that higher the scope of returns, higher the volatility. Although mid cap stocks offer a greater possibility of earning big gains, they are far more volatile at the same time.
“Whilst mid-caps can outperform large caps in the long run, they do tend to come with higher volatility as well. Thus, it is important for investors who are considering investing in mid cap funds, to have a 10-year investment horizon, and be comfortable with the associated temporary volatiles that accompany mid cap investing,” says Vishal Dhawan, Founder of Plan Ahead, an investment advisory firm.
“Gradual investing strategies like SIPs and/or STPs can be considered to deal with the volatility as well,” he adds.
“Among Equities the typical thumb rule is the lower you go down the market cap the more volatility you face. Now volatility is a measure of risk and as we all hear — higher risk assets are also expected to provide better returns over longer periods,” adds Abhishek Dev from Epsilon Money Mart.
