Twenty years ago, Asian Paints wasn’t a stock that was on the top of most investor’s lists. However this Chennai-based company has posted a whopping 7000% return in 17 years. The same goes for several other heavy stocks of today such as Eicher Motors, Infosys, or Wipro. What they all have in common is that twenty years ago they were considered mid cap stocks. Which meant that only investors with a moderate to high-risk appetite would have been willing to risk their capital on them. Mid cap stocks come with increased risk as compared to large cap, blue-chip stocks, but the rewards can also be increasingly handsome. For this reason they make a useful addition to any investor’s portfolio. Depending on your risk appetite, you can add a healthy mixture of large cap and mid cap shares to balance prudence with growth.
What are Mid cap stocks
Mid cap stocks is a term used to refer to stocks that fall somewhere between small cap and large cap stocks. The exact definition of the term mid cap has remained vague and varies with time. As a general rule of thumb, the following classification based on market capitalization should serve our purpose:
- Large cap stocks– Market capitalization of more than Rs. 20,000 crores.
- Mid cap stocks – Market capitalization of Rs. 5000 to Rs 20,000 crores.
- Small cap stocks– Market capitalization of less than Rs. 5,000 crores.The “cap” in each refers to capitalization
How to Monitor Your Mid cap stocks
Mid cap stocks have the potential for great returns. This does not however mean that they will always give high returns. In 2018 for instance, while the Nifty was up by 4%, the mid cap index was down 16%. This means that the mid cap stocks in your portfolio also need constant monitoring. You cannot afford to simply buy them and confine them to an old suitcase hoping that 15 years later they will magically turn you into a millionaire. Here’s a handy checklist to make sure your mid cap stocks earn their place in your portfolio:
Perform Basic Fundamental Analysis
Mid cap stocks in certain sectors can be highly responsive to global macroeconomic cues. For instance, mid cap stocks in the auto ancillary space may be impacted by prices in the movement of metals. Check the long term outlook for the factors likely to affect the mid caps in your portfolio and act accordingly.
Do Not Overlook Liquidity
Checking for large trading volumes is one of the fundamental checks most investors perform when taking a position. This applies to mid caps as well. You do not want to be stuck with a stock you cannot find any buyers for when the going gets a little rough.
Do Not Alter Your Portfolio Composition Based on Short Term Market Events
A good portfolio generally has a mix of large, mid, and small cap stocks each as a percentage of the portfolio. Your mid cap stocks occupy a certain percentage of your portfolio which needs to be adhered to even in the face of short to medium term adversity. So for instance, if you have dedicated 25% of your portfolio to mid cap stocks, you should resist the temptation to increase or decrease this percentage based purely on how the market is performing.
Monitor Past Performance
Mid cap stocks that have shown consistent growth over the last 4-5 years can be good picks. Similarly, it is best to stay away from stocks that have shown too much volatility. Your mid cap portfolio should ideally consist of stocks with a good past record.
Get to Know Your Managers
With mid cap stocks, the people at the helm of affairs in the company can make or break it. Good management and solid corporate governance are the yardsticks to measure mid cap stocks with. Unlike in the case of large cap stocks, the leadership of mid cap companies are not always very publicly visible. So one is better off trying to monitor publicly available data such as auditor and analyst reports.
Adversity is the Test of a Mid Cap Share’s Character
How a mid cap performs in times of downturns is a better indicator of its worth than how it performs in times of bull runs. Anyone can ride a wave but it takes solid fundamentals led by strong leadership to survive a crash.
Keep an Eye Out on Regulations
As already mentioned, mid caps are vulnerable to external shocks. Changes in regulatory frameworks to the industries in which mid caps operate can greatly affect their performance in the medium to long term. For instance changes in patent laws can have a lasting effect on performance of mid cap Pharma companies that often rely on generic drugs.
Mid cap shares have the potential to give great returns over the medium to long term but they also come with greater risk. The best way to manage this risk is to constantly monitor your mid cap portfolio using the 7-point checklist mentioned in this article.