Catch them young,but watch your back

Equity is a game of risk-reward trade-off. One has to be absolutely careful while picking up the mid-cap stocks as one wrong choice may wipe out the gains made over the years.

The mid-cap enigma

Since the last two years,Indian equity markets have witnessed huge volatility making it difficult for the best of fund managers to take a correct call on stocks. “Directionally,markets are expected to remain volatile and thereby provide investment opportunity. We believe that money can be made due to volatility and there is long-term value in the market as there are many stocks with attractive valuations at this point of time,” says Nimesh Shah,managing director and CEO of ICICI Prudential Mutual Fund.

Mid-caps fell by 34 per cent last year as compared to a 25 per cent fall in the Sensex. Rising interest rates hit the balance sheets of many mid-cap companies leading to their under-performance. Mid-caps have in the past outperformed large-caps during the start of a bull run as happened in 2007 and 2009. However,when there is a sharp correction,mid-caps fall at a much faster pace as compared to large-cap stocks. “Mid-caps are different. They tend to over-perform and under-perform by a larger margin. Mid-cap stocks that under-perform tend to do so by huge margins,” says Dhirendra Kumar,CEO,Value Research. Mid-caps and small-caps are considered riskier than the large-caps in the equity universe. One reason is that it is easier for the mid-cap companies to hide information as the public gaze is mostly on big companies and most mid-caps are not researched in great detail,experts say.

Most mid-cap stocks tend to remain under the margin pressures especially during the high interest rate and higher borrowing cost scenarios. Also,mid-caps have a tendency to become illiquid (difficult to find a buyer) in a short span on a negative news flow.

Should you invest?

“One should create a mixed portfolio within the mid-cap space. Companies in infrastructure,banking,pharma and commercial vehicles segment must be part of the portfolio,” says equity market veteran Gul Teckchandani. Experts believe that the markets will remain range-bound in the short-to-medium term and that a bottoms-up approach would work well for the investors. “One could use dips to accumulate stocks of companies having good managements and strong balance sheets,” says D Kannan,managing director,Kotak Securities.

Angel Broking says in a note,“we believe in a stock-specific approach in the mid-cap space. Mid-caps which are leading brands within their respective sectors or which are trading at deep discount valuations or which belong to high-growth sectors benefitting from rural,export or consumption themes can offer handsome returns.”

Equity as an asset class is known to give highest returns on investment over a longer period. Experts say the right stock picks can create lot of wealth for investors. However,“right” stock pick is the most tedious job in equity investing. With regular news of rigging in the prices of mid- and small-cap stocks,utmost caution must be exercised while stock picking. A thumb rule which old timers suggest is to choose the leader (best stock) in every segment and avoid speculative stocks. Retail investors tend to enter in the last leg of a rally of any bull market and that is the riskiest time as in the eventuality of a correction,mid-caps tend to fall at a much faster pace.

Experts suggest that investing in mid and small-cap stocks is meant for those who can digest and sustain huge losses. Another smart way of investing in the mid-caps is through a diversified equity mid-cap mutual fund route. A qualified and experienced fund manager would be in a better position to take the right stock calls based on the market intelligence.

After the disappointing IIP data and poor Infosys result last week,there are two significant events lined up this week. One is the headline inflation numbers and second is RBI monetary policy review. While the market seems to have already discounted a 25 basis points rate cut,it is expected that if the RBI does cut the rate,it would definitely bring cheers to the market.

A correction in the crude oil prices and some key policy initiatives from the government can take the equity markets back to the previous highs. Investors who have been waiting for a long time for the equity markets to perform and have a higher risk profile can consider picking up some good quality mid-cap stocks to diversify their portfolio. The idea is to catch them young as many of these mid-cap stocks would become large-cap in times to come.

—ritukant.ojha@expressindia.com