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Buy only if you can manage higher risk, MFs best route for lay investors

Often it is said that today's mid-cap stocks are tomorrow's large caps. This means if you can identify a fundamentally strong mid-cap company, invest in the same and hold it for 5, 10 or 15 years, the same stock would be worth several times your initial investment. In other words, if you have the risk taking ability to invest in such stocks, either directly or through the mutual fund route, and remain invested for long, you can probably benefit hugely from the runaway growth of such companies.

 

This holds good for the Indian market too. If you look at the history of the market, you can see some of the leading companies of today were mid-caps a few years ago: Infosys and Bharti Airtel are examples of this phenomenon.

 

Although there is no exact definition of a mid-cap stock, and so the definition also changes in the market's context.

 

Usually, a company with a market capitalisation of between Rs 1,000 crore and Rs 5,000 crore is taken to be a mid-cap stock in India. If you observe, these are also the stocks which do not fall within the group which constitute the BSE sensex or the NSE nifty indices. This scale could shift substantially in a strong bull run when several of the non-nifty companies may also have market cap of over Rs 5,000 crore. On the other hand, if the market is in an extremely bearish phase, like from October 2008 to March 2009, some of the stocks in the benchmark indices may have a market cap closer to or lower than Rs 5,000 crore. But like in the bull phase, not all stocks with over Rs 5,000 crore market cap will be a large-cap, in a bear phase not all with a Rs 5,000-crore market cap will be a midcap. The market has its own way of classifying a large-cap, a mid-cap and a smallcap stock, and there is some element of subjectivity to the classification.

 

In India, the two leading bourses — the NSE and the BSE — have their own mid-cap indices. As an investor, if you are not experienced enough to distinguish between stocks by their market capitalisations, you could follow these indices for a better and safer understanding of mid-cap and other stocks. tor to invest in midcaps, we also educate them about the likely volatility, measured by the standard deviation. As an investor you can invest in these stocks only when the investment horizon is several years (long term) and you have the risk taking ability.

So how much of one's portfolio should be invested in midcaps? Again that depends on the risk-taking ability of the investor and the time horizon of the investment. There should be a strict monitoring of the midcap exposure, combined with regular reviews of the exposure to these stocks, financial planners and advisors said.

Exposure to midcaps through the mutual fund route brings down the overall volatility of the portfolio while a direct exposure through midcap stocks makes the investment more risky. Whatever the chosen path to mid-cap investing, while investing in these stocks one should always take the wealth creation approach, meaning one should stay invested in these stocks for several years.

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