Investors usually rush after stocks of large sized companies and the mid caps are often neglected. There is one strong perception that rules the mid cap stocks – these stocks are considered as risky in comparison to large cap stocks. Owing to the intricacies emanating from the size of these companies, the perception is not completely wrong, Apart from this, the fact is that these stocks are often found to be under researched. If I give you an option of researching on two stocks, one belonging to a large sized company and the other falling in the domain of mid cap. I am sure that you pick up large sized company for the purpose.I completely understand the reason behind your choice of picking the large sized company – one is easy availability of data on these companies and stocks. However, if an investor has the courage and determination to identify the right kind of mid cap stock for investments then he can benefit at large from this exercise.
Now, what exactly you need to find in a mid cap equity to include it in your portfolio, it is the combination of possibility of the valuation re-rating and the chances of strong growth in earnings. Always, remember that there are strong chances for a mid cap stock to outperform the large cap equity, specifically in times of market revival. So, in such market conditions, you can definitely try your luck. And your luck will surely shine on you if you have done your groundwork seriously.
We have learnt on the potential of mid caps in the last paragraph. Let us now learn about the various challenges that you will have to face in case you decide to add mid caps to your portfolio.
Not all mid cap equities are traded and tracked by brokerage houses, so you will not find adequate information on their historical values, trends and fundamentals. The lack of information makes these stocks risky. Moreover, the chances of failure of these organizations are more in comparison with the large sized organizations. The quality of management of mid cap organizations is also a serious concern. The brokerage houses usually keep a track of the performance of the large cap companies which makes them less risky for investors. But when the quality of management of a mid cap cannot be measured or compared, the riskiness of these companies get increased. Obviously, nobody will love to give their hard earned money to somebody whom they are not aware of. At least, I never had the courage to do so.
Irrespective of the fact, that you are investing in large caps or mid caps, you need to consider the valuation, management quality and business characteristics before investing. But due to inadequacy of details, the last two factors are overlooked while investing in mid caps and because of this the mid caps become comparatively riskier than the large caps.
Role of FII – If you find that Foreign Institutional Investors are ready to make investments in the mid cap then it is only because that they have found a good potential in the company. If this is the case, then investment in the stock of such mid cap is still a safe bet.
Volatility – If you want to keep a close watch at the prices in the short term then keep your hands off from the mid caps. If you are really serious on making investments in mid caps then you should go for a long period of time, i.e. at least 3 to 5 years. You will often find more volatility in the mid caps because of the fewer shares. It does not necessarily mean that the shares are risky.
When to exit the mid cap holdings?
The time to exit from the mid cap holdings are one of the crucial things to decide. If you find that your mid cap equity company is performing slow, the growth is not up to the mark, the earnings are not consistent and on the upper side, then you must seriously think on gracefully exiting from the holdings. There should be no shame in bringing a modification in your portfolio if you think that doing this will be a better option.
Get as much information as possible, think wisely and then include the right mid cap equity to your investment portfolio.