Why Do Retail Investors Prefer Investing In Midcap?

Why do investors prefer investing in Mid-caps? The simple answer to this question is because over a period of last five years Midcaps and Small Caps have provided better returns then the large cap stocks as encapsulated in the table below:

The picture gets even better when one looks at individual stocks, a snap shot of the top performing stocks in the Nifty Midcap 50 shows that companies such as Dalmia Bharat, Biocon have given returns that are unheard of in the Large cap space.

Today, wherever there is visibility of earnings growth along with sustainability, the market has re-rated the stock; or, is willing to pay a high valuation. Midcap, Small Caps are considered growth stocks, where earnings are expected to grow at faster rate. Higher midcap P/E simply indicates that investors expect midcap earnings to grow faster than large cap earnings.

Some tips for Mid Cap & Small Caps Investing-?? Although, the Midcap and Smallcap looks a promising space to be in, however in periods of market corrections or heightened volatility these stocks seem to overreact to the market conditions and tend to correct a lot more than their Largecap counterparts as shown in the table below.

Therefore it?s important to remember that higher returns brings higher volatility, investors should remain patient in times of market corrections if they are in the right stock. Another key aspect to remember is that since the market cap of these companies are smaller they are easy targets for price manipulation therefore an ideal strategy is to put a good amount of time in researching about the stock one buys and stay long as the fundamental story is intact.