08 April 2015

Mid-cap Mutual Funds

Mid-caps lie between large cap stocks and small cap stocks. Mid cap stocks are those that generally have a market capitalisation within the range of Rs 50 bn and Rs 200 bn. These represent mid-sized companies that are relatively more risky than large cap as investment options yet, they are not considered as risky as small cap companies. They rank between the two extremes on all the important parameters like size, revenues, employee and client base. 

When one invests in mid-caps for the long term, he may be investing in companies that could become tomorrow's runaway success stories. Generally speaking, mid cap stocks as an investment can bring you higher returns in 3 to 5 years as opposed to their big brother large cap stocks that can bring you moderate (yet safer) returns during this timeframe. 

Investors have been looking at the wonderful promise of midcap gains and have gone into a frenzy of pouring money into these funds that specialise in them.

The past year has seen the Nifty (stock index of the National Stock Exchange) post impressive gains of 42.60%.

But, these returns pale when compared with the dazzling 107% of the CNX Midcap 200 (index of mid-cap stocks).

However, wrapped inside this promise is a dangerous threat? Their recent gains notwithstanding, mid-cap stocks are a far riskier bet than large caps.

What are mid-caps?
·         If the number of shares in a company is multiplied by its current price, the result is market capitalisation. Based on this, companies are classified as large-cap, mid-cap and small-cap.

·         Blue chips are the largest companies in their sectors; the ones with the largest market cap.

·         If you can identify tomorrow's blue chips today, you could make a pile of money.

·         That's because these stocks, with smaller market caps, are usually priced low, since investors have not yet discovered their potential.

·         In the mid-cap segment, you may find such companies.

·         In fact, big investors, like mutual funds and Foreign Institutional Investors, have started investing in mid-caps in the recent past, because the price of large caps has increased substantially.

·         That has led to a big rally in small and mid-caps, with their prices climbing upwards steadily.

·         The mid-cap segment of the stock market is, thus, being increasingly perceived as an attractive investment segment with high growth potential.

However, there are certain things you must know about mid-cap stocks before you invest in them directly or via a mid-cap mutual fund.

Why mid-caps are hot
High volatility

These stocks tend to be very volatile.

Volatility is the rate of change in the price of the shares over a given time. The greater the price fluctuation, the higher the volatility.

Historically, mid-cap stocks have displayed the tendency to rise more than large-caps in a booming market (like the one you are seeing now) and plunge to more depths when the markets dip.

While mid-caps may be going great guns at the moment, their historic record shows that they can fall like a pack of cards in bad times.

Should you invest in a mid-cap fund?

If you have already invested in a diversified equity fund (fund that invest in the shares of various companies of various sectors), then you should know that even they have notably increased their exposure to mid-cap stocks.

So you are actually getting the mid-cap benefit even in a normal diversified equity fund

But, if you are willing to take the risk, then you could consider a mid-cap fund.

But do note, each fund house defines a mid-cap stock in a different way. Since there is no standardised definition of a mid-cap stock, each mutual fund will have its own. So what one fund house may consider a mid-cap, another may not.

It is undeniable that the spectacular performance of the mid-cap stocks has been nothing less than breath-taking.

You can make money. In fact lots of money. But how much you invest in mid-caps depends on how much of risk you are willing to take.

Remember, all mid-caps are not tomorrow's large-caps.

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