InvestorQ : Is there a case for investors to prefer mid cap stocks over large cap stocks in the Indian context?
Riya Dwivedi made post

Is there a case for investors to prefer mid cap stocks over large cap stocks in the Indian context?

rhea Babu answered.
2 years ago

Mid caps surely give you the alpha that large caps cannot. There is only so much that you can earn on a TCS or HDFC Bank or RIL, despite all of them being fantastic companies. Prima facie, there is definitely a case for preferring mid-cap stocks over large cap stocks, as borne by the past performance. For example, Eicher, Havells have all been multi-baggers over the years but that would have only been possible if you had entered these stocks when they were mid caps not today. Hence, when you buy mid caps, there are four key points that you must keep in mind.

· Mid caps are all about stock selection and your bottom up approach is bound to work much better in this case. Stock selection becomes critical in the mid-cap space and hence micro level research and a bottom-up approach becomes important in this case.

· The universe of mid caps is fairly large and therefore selection becomes all the more tedious. For example, if you look at the listed stocks on the BSE there are nearly over 3500 companies that would classify as mid caps or as small caps. Promoter track record, therefore, becomes a key factor in these cases.

· Large cap stocks tend to be largely dependent on FPI flows. Any shift to risk-on trade can prop up the large caps substantially lending outperformance over mid caps. Most FPIs are not too active in the mid caps space due to size and liquidity concerns and also their research teams don’t track these mid cap stocks.

· Unlike the Sensex and Nifty, the benchmark valuations are not exactly reliable in the case of mid-cap indices. This makes the task of benchmarking performance and evaluation valuation metrics fairly complex in case of mid-cap stocks. While there are mid cap indices, you need to remember that mid caps are by nature very heterogeneous and hence a single index will not work. So benchmarking remains a challenge and the best you can do is with the peer group.