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What is Mid Cap Stocks in India?
Mid cap stocks are shares of companies whose market capitalisation is more than INR 5,000 crore and less than INR 20,000 crore. A mid-cap stock’s market capitalisation is typically one-fifth that of large-cap companies. Mid cap stocks are smaller than large cap stocks in terms of revenue, client base, size, employees, etc. These stocks are comparatively more volatile than large cap stocks. Nonetheless, these stocks are less risky than small cap stocks.
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Since mid cap stocks are risky, the return potential is also high. Thus, investors who are willing to undertake higher risk can invest in mid cap stocks than large cap stocks.
In comparison to large-cap stocks, information regarding mid-cap stocks isn’t extensively available. Thus, it becomes difficult to analyse mid cap stocks.
One of the favourable aspects of investing in mid cap companies is that their revenues and profits are predicted to rise. A company’s productivity, value and market share are all predicted to rise in tandem with earnings.
Since these stocks belong to companies that have just entered the growth stage, their market position is considered volatile. However, they have a good chance of becoming large cap companies in the future.
Features of a Mid Cap Stocks
Following are the features of mid cap stocks:
Diversity
Midcap stocks span a wide range of sizes, bordering both large cap and small cap companies. The profits and risks associated with these shares vary. Some mid cap firms may be nearing the developmental stage and thus offer higher stability over returns, whilst others may have recently transitioned from small-cap status and thus offer greater returns over stability.
Growth Prospects
One of the most favourable features of mid cap stocks is their strong potential to improve profitability, productivity, and market share. Mid cap companies can gain significantly during a bullish market or favourable market conditions, resulting in exponentially higher returns.
Risk
Mid-cap stocks are less volatile in comparison to small cap stocks. However, in comparison to large cap stocks, mid cap stocks are more volatile. As a result, the returns are greater than large cap stocks during favourable market conditions or bullish trends. On the contrary, the returns will be significantly low in comparison to large cap stocks during a downtrend.
Liquidity
Midcap companies are more well-known than smallcap stocks. Thus, investors are more comfortable investing across mid-cap companies. In comparison to small-cap stocks, mid-cap stocks are relatively liquid. Since they are popular and well known, buying and selling stocks is easy. As a result, mid-cap stocks offer good liquidity to their investors.
Advantages and Limitations of Investing in Mid Cap Stocks
Advantages
Following are the advantages of investing in mid-cap stocks:
Portfolio Diversification
If an investment portfolio majorly comprises large-cap companies, then it will be difficult to generate aggressive returns. The CAGR from mid cap companies will be higher in comparison to large cap stocks. Thus, adding mid-cap companies will help diversify the investments and earn higher returns.
Good Potential to Become Large Caps
Mid-cap companies have the potential to grow into large-cap companies in the future. Thus, investors can benefit from the gains that mid cap stocks provide during their growth phase.
Growth
In comparison to small-cap companies, mid-cap companies have a greater ability to raise capital through credit, improving their potential for development and expansion. Thus, mid-cap companies can expand their businesses more aggressively than small-cap companies.
Returns
As most mid-cap companies are in their growth phase, the scope to generate higher returns is significant. Value appreciation and dividend payments help investors in generating good returns.
Price
Mid-cap stocks are less expensive in comparison to large cap stocks. Since these stocks are less popular than large cap stocks, their attention is slightly lower. This leads to the low price of the stocks, and as a result, they become more affordable. However, not all stocks are undervalued. It is necessary to properly analyse all the parameters and identify stocks with good growth potential at the optimum price levels.
Suitable for Long-term Goals
Since mid cap stocks are highly volatile, they are suitable for long term investing. The volatility averages out over the long term and helps you generate significant returns. Thus, one can invest in mid cap stocks for their long-term goals.
Limitations
Following are the limitations of investing in mid-cap stocks:
Volatility
Mid-cap stocks are highly volatile in comparison to large-cap stocks. Though they have a high potential to earn greater returns than large cap stocks, the probability of generating negative returns is also high. Thus, these stocks are not suitable for all types of investors. Investors who are comfortable with high volatility should invest in mid-cap stocks.
Company’s Management
Large-cap companies are reputed firms with a proven track record. Thus, the large-cap stocks are more stable. But mid-cap companies are less known and are still in their growth phase. Hence, in the mid-cap segment, it is necessary to ensure that management has the skill and bandwidth to grow the business. Furthermore, these stocks are often under-researched. Hence more stringent due diligence is a must.
Who Should Invest in Mid Cap Stocks?
Mid-cap stocks are suitable for investors who are comfortable with the higher volatility that comes with these stocks. These stocks are suitable for a long-term investment horizon. Mid-cap stocks can offer potentially higher capital appreciation than large-cap stocks. These stocks are more volatile than large cap stocks and less volatile than small cap stocks.
Including mid cap stocks in your investment portfolio will help you generate significant returns in the long term. Having some exposure to these stocks will increase the portfolio’s capacity to generate higher returns during favourable market conditions.
Therefore, you can consider investing in these stocks to achieve your long-term goals and objectives. Their potential to become future large-cap companies offers a great opportunity to generate significant returns.
Also, if you lack the expertise to identify and analyse a mid cap stock, you can consult an advisor and take their help to build your investment portfolio.
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