Mid cap Stocks- Make your investments right!!

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“Equity markets” are the most attractive & glamorous investment instrument available for potential investors. Every investor wants a piece of it in their investment portfolio. However little do these investors know that the stocks are mainly divided in three classes, depending on their market capitalization.  Market capitalization of a stock traded in the market is the current market price of the stock multiplied with its total shares outstanding. The three classifications are “Large Cap”, “Mid Cap” & “Small Cap” shares.

 

However the most attractive out of the three classes is Mid Cap stocks. A mid-cap stock offers a middle ground between the safety but slower growth potential of large-cap/bluechip stocks and the extremely high growth potential but higher volatility of small-cap stocks. The National Stock Exchange (NSE) defines the mid-cap market as stocks whose average six months market capitalisation is between Rs 75 crore to Rs 750 crore. However the market capitalization varies from market to market and company to company.

Why invest in mid cap stocks?


The history of stock market has proved that when the market bounces back the mid-cap stocks rise faster than the large cap. Mid-cap companies can be future leaders or a potential large cap company. Thus mid caps are called wealth creators if held for a long period. If one is willing to take moderate risk, mid cap stock is the place. Mid-cap shares are considered an attractive investment avenue because their growth rate is faster. Huge investors like mutual funds and Foreign Institutional Investors are increasing investments in mid caps. Incase of volatility mid cap stocks are less volatile compared to small cap shares. Thus mid cap stocks are considered one of the most attractive equity investments as its returns are higher compared to large cap and risk is lower when compared to small cap stocks.

Why be cautious before investing in mid cap stocks?


Mid cap stocks may have the potential but always remember all mid caps are not future large caps. Mid cap may not very liquid. The prices may rise but actual trading volume may reflect the same.  Compared to large caps, mid caps have high volatility and sink to more depths when the markets fall.  Investors who can take more risks should only invest in them. Thus a volatile financial performance and an inadequate free-float makes investing in mid -cap shares more risky than in big companies.

One who is already exposed to diversified equity mutual funds need not invest in mid cap stocks as the investors are already getting the mid-cap benefit in the same. The limit of investing in mid caps should completely depend on how much risk one is willing to take. Mid caps can turn out to be great investments if the investment is done for a long term financial goal. Mid cap funds are a great option if the investor wants to diversify his portfolio beyond only blue-chip funds. Also investing through the mutual fund route is better in case of mid-caps. This is because these companies need to be constantly tracked for performance. It’s easier for you to track one midcap fund than 10 different midcap stocks. However before investing in mid cap fund it is better to consult your financial planner to know whether they really required in your investment portfolio for your future goals.

 

 

By Namrata Shah.

The writer is working with FpGuru.com as a Financial planner.

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