Is this the right time to invest in midcap stocks?

Is this the time to invest in mid cap stocks? This is a million dollar question faced by a lot of investors today. Mid-caps have underperformed consistently over the last 2 years. Even if you leave out the companies with genuine problems, there are enough companies in the mid cap space that are getting back to attractive valuations. Check the index comparison.

Data Source: NSE

In the above chart, we have considered the comparative Nifty returns with Mid-Cap Nifty returns since January 31^st 2018. The reason we have taken this date as the base is that the Union Budget 2018 announced the tax on LTCG, which led to a major sell-off in the markets overall, especially in the mid cap space. While the Nifty did manage rather tepid returns of 8.03% over the last 21 months, the Mid-Cap index has given (-13.61%). Does this really make a case to invest in mid-caps at this point of time?

Key considerations before investing in mid-cap stocks

Any investment in mid caps should be driven by a mix of macro and micro considerations. Here are some key points to look at.

1. The mid-caps have typically done very well in the markets when the growth outlook has been high. With GDP growth for the full year being now revised to around 5% and financial institutions like Nomura and SBI projecting 4.2% growth in Q2, mid caps could have a problem on hand.

2. Mid caps have normally benefited as a class when the rupee is stable and oil prices are at lower levels. While Brent Crude has hovered around $60/bbl, you will recollect that the best returns on mid caps came between 2014 and 2017, when crude prices were much lower. Currency volatility could be the real concern.

3. Most mid-caps are not widely tracked by analysts. For example, a stock like RIL or Infosys may have more than 50 analysts tracking the stock. Hence, there is abundant information available.  Information flow is a major challenge for mid-caps.

4. Corporate governance has been a major concern with most mid caps. Many of these mid-caps have vulnerable accounting and disclosure practices that tend to put tremendous pressure on valuations of these stocks.

5. Lastly, there is a challenge of business models of mid caps. Most mid-caps are single product line companies and issues like cycles, competition and disruptions are genuine risks. Also, most mid caps tend to focus their models on just a handful of customers.

You should look at mid-cap stocks only if you are considering investing in them from a long term perspective and the above factors do not pose a major risk. A better approach would be to buy into mid-cap funds, which can give you the added benefits of professional stock selection and a natural diversification benefit. Let us look at the best mutual funds in India for mid caps and how to go about it.

Best mutual funds in India for mid-caps

Mid cap funds have long been the flavour of the Indian markets. However, in the last one year there has been a dual reluctance. Investors are wary about committing money to mid-cap funds and even AMCs are actually putting a halt to fresh inflows into mid-cap funds due to limited choice of stocks. But mid-cap funds can be a long term solution.