Mid cap stocks in India are stocks of companies whose market capitalization is between Rs 5,000 crores and Rs 20,000 crores. Market capitalization is calculated as – Total outstanding shares in the market x Market price of share. These companies fall between large cap and small cap companies.
Features of Mid cap stocks
- Mid cap stocks vary in terms of risk and returns as the companies could be at different stages of growth.
- These companies have a potential to grow their profitability and market share. There is a possibility for mid cap stocks to become money spinners and bring windfall returns during the bull market phase.
- These stocks offer less stability and low capital protection during a correction, bear market or recession.
- Mid cap stocks are less liquid when compared to large cap stocks.
Should you invest in mid cap stocks?
- Mid cap stocks have excellent growth opportunities. These stocks have the potential to generate huge returns. Investing in mid cap stocks which have strong fundamentals and strong balance sheets can bring good returns.
- There is a greater degree of risk in mid cap stocks compared to large caps. However since these companies are in the growth phase they tend to generate better returns than large companies.
- Mid cap stocks are affordable compared to large cap stocks.
- Mid cap companies provide information on their financials and businesses. It is easier to analyze the data and invest compared to small caps.
Risk of investing in mid cap stocks
- Sometimes a company consistently keeps making low profits with limited cash flow and is not able to break through the phase. This phenomenon is called ‘value trap’. If the trend continues for a long period then the company can go bankrupt.
- Many a times, mid cap companies have a less efficient managerial and operational infrastructure. This can result in limited growth and may not bring optimal utilization of profits for business expansion.
- A mid cap company may perform remarkably well due to a financial bubble or unstable economic conditions. Once the bubble bursts the company might collapse.
Alternatives to investing in mid cap stocks
As mid cap stocks tend to be risky an investor should explore other options which would help to generate equally good returns. Listed below are some of the alternatives:
- Sovereign Bonds: These bonds are issued by the Government. The bonds offer minimum risk and a regular source of income over a fixed period.
- Debt Funds: These funds invest in fixed income securities like treasury bills, bonds etc. They provide low risk and regular income.
- Balanced Funds: These funds invest in equity instruments and debt in a certain ratio. They provide a risk-reward balance.
- Flexi cap Funds: These funds invest in stocks spread across the large cap, mid cap and small cap categories. There are no restrictions to investing in companies based on market capitalization.
