What are Mid-Cap Stocks?
Mid-cap is an approximate term that encapsulates companies and stocks which fall in between large-cap and small-cap category. The classification of respective company’s stocks depends on its market capitalisation. Such classification is variable and can change with the change in a company’s market valuation.
The term market capitalisation is reckoned with the help of a company’s outstanding number of shares and the value of each share.
The following table demonstrates large-cap, mid-cap, and small-cap companies as per their market valuation.
|Market Capitalisation above Rs. 20,000 Crore.
||Market capitalisation in between Rs. 5,000 – 20,000 Crore.
||Market Capitalisation below Rs. 5,000 Crore.
However, the classification is also subject to a company’s rank in the benchmark indices such as Sensex and Nifty. For instance, the companies which are listed from 101st – 250th in the Nifty Index are generally considered mid-cap companies. Nifty also has a benchmark mid-cap index in India called the Nifty Midcap 50 which hosts the top 50 most traded mid-cap securities in the market.
What are its Features?
Some of the crucial features of these stocks are discussed below –
- Diversity: Mid-cap shares lie on a broad spectrum, bordering both small-cap and large-cap stocks. These shares vary in terms of returns and risks entailed. Some mid-cap companies might be nearing developmental stage, and thus, might offer greater stability instead of returns; whereas some companies might have recently graduated from small-cap and therefore allow greater returns compared to stability.
- Chance of growth: One of the most appealing characteristics of these stocks owned by mid-cap companies in India is that they have a high potential to enhance their profitability, productivity, and market share. Investors can expect such companies to become an overnight success during bullish market or market expansion, which will exponentially increase their returns.
- Moderate risk: Compared to small-cap stocks, these stocks respond with lower intensity to market volatility. However, in comparison to large-cap stocks, they offer less stability during market contraction or bearish market.
- Liquid: Mid-cap stocks are relatively liquid compared to small-cap stocks. Companies with such stocks are well-known, and investors can trust their shares. Therefore, it becomes easier to find buyers during a sale at a fair price.
Why Should You Invest in Mid-Cap Stocks?
In the past few years, mid-cap stocks have performed significantly better than both large-cap stocks and small-cap stocks. Given their advantageous position in the stock market, where they can exploit the best of both ends, i.e. risk moderation and substantial returns, they have become a favourite of seasoned investors. They aid in diversifying an investment portfolio. Including them in your portfolio has significant advantages which are discussed in the points below –
- Ease of growth: Mid-cap companies in India have a better scope of raising finance through credit in comparison to small-cap companies; thereby, enhancing their potential for growth and expansion.
- Return potential: Given that most mid-cap companies are positioned in the middle of the growth graph, they have room for value appreciation and allow for substantial dividends too.
- Less analysed: Most mid-cap shares are not analysed that often in their initial days resulting in limited attention from large institutions and seasoned investors. It leads to low pricing, thus making it more affordable to include in your portfolio. If you can adequately gauge which stocks from a mid-cap stocks list have the potential for increased analysis and attention in the future and invest largely in those funds, you can gain substantial returns.
- Considerable information: Unlike small-cap companies, companies with these stocks provide enough information on their financial health and history. This makes it easier to analyse companies from a mid-cap stocks list. You can thus effectively conclude on their growth potential and profitability to make an informed decision regarding your investment.
What are the Risks Associated with Mid-Cap Stocks?
A company’s graduation from small-cap, in most cases, attests to its growing profitability and productivity, until it reaches the large-cap tier, thereby increasing both the components of returns – dividends and value appreciation.
However, this condition might not apply to every company falling under the mid-cap index in India. A few risks associated with these stocks are –
- Value Trap: Value trap is when a company consistently operates in low profits with limited cash flow, and cannot break through the phase. Mid-cap companies, especially the low ranking ones, are prone to value trap and might go defunct if the trend continues for a longer period.
- Inadequate resources: Mid-cap companies are likely to have less efficient managerial and organisational infrastructure than large-cap companies. Therefore, even though they reap high profits and attract value appreciation, they might not be equipped to utilise the same optimally.
- Effect of a financial bubble: A mid-cap company’s exceptional performance can be a result of an unstable financial bubble. Most of these companies, however, do not have the financial fortitude to withstand when the bubble pops. Therefore, when scouring through best mid-cap stocks, ensure to check their financial history pre-bubble to determine their financial fortitude accurately.
What are Some Alternative Options to Mid-Cap Stocks?
Here are some investment options which offer lower risks compared to mid-cap stocks and an assured avenue of returns –
- Sovereign Bonds: These bonds are issued by the government and promise a regular source of income over a fixed period with minimum risk.
- Debt Funds: These funds are used to invest in fixed income securities such as debentures, bonds, treasury bills, etc. They provide steady income against comparatively lower risk.
- Balanced Funds: These funds are used to purchase both stocks and debt instruments. Therefore, they diversify your investment portfolio while striking a balance between high returns and measured risk.
You can consult a market professional regarding your investment to decide on the choice of the best investment option to bank on your capital.