2020 was a year of upheavals. The sudden onset of the Covid-19 pandemic led to an unprecedented market crash, followed by an equally spectacular recovery. The greatest growth momentum was witnessed in the small and mid-cap segments with the S&P BSE mid cap index moving upwards by 20% while the S&P small cap index rallied by 32%. By contrast, the Sensex rallied only by 15% in 2020. Clearly, there is some steam in the mid cap segment at the moment. However, it has caught investor’s fantasy as the present mid cap rally comes after 2 consecutive years of underperformance by small and mid cap stocks, leading investors to speculate that this time the mid cap stocks might be set for a longer bull run.
What are Mid cap stocks?
There isn’t a very strict criterion in place to define mid cap stocks in the Indian markets. However, classification is generally made on the basis of market capitalization. Stocks with market capitalization greater than Rs. 5000 crores but less than Rs. 20,000 crores are generally classified as mid cap stocks in the Indian markets. Mid cap stocks are preferred by investors as they have the potential for greater returns over the medium to long term as compared to large caps but come with fewer risks than small caps. Mid cap stocks also tend to be more liquid than small caps.
Mid cap stocks in 2021
There are several reasons investors are keenly watching the BSE mid cap in 2021.
Strong Rally Since 2019
The BSE midcap index has gained 33% since the end of 2019 to date. By comparison, the Sensex has only managed 16%. This has led to even otherwise conservative investors sitting up and taking note. Buoyed especially by the post-pandemic growth of the markets in the second half of 2020, mid caps have jumped up sharply.
Easy Monetary Policy
Since the coronavirus pandemic in 2020, central banks the world over have been following an easy monetary policy. Governments have announced several rounds of stimulus packages to revive stalled economies. A lot of this money has flowed into mid caps as they tend to be cheaper, leading investors to buy more of them.
Midcaps Trading Above Their 50 and 200-day DMAs
Several mid caps are now trading above their 50 and 200-day DMAs signaling strong uptrends. These indicators are in turn fueling a greater inflow from investors.
Greater Investor Risk Appetite
Given the strong recovery of the Indian economy after the unprecedented Covid-19 crash in March, investors feel resilient and in the mood for greater risks. This is leading a lot of investor money to flow into mid caps as they provide greater space to grow as compared to large caps.
Record FII Inflows
Foreign Institution Inflows poured in a record Rs. 1 Lakh Crore in 2020 leading to a rally across segments.
Greater Resilience to Global Shocks
Typically mid caps tend to be more focused on the domestic market as compared to large caps which are often integrated into the global supply chain. Shocks to the global system such as the coronavirus pandemic tend to affect large caps more than they affect mid caps. As result, as soon as the economic recovery begins, mid caps are poised for greater growth compared to large caps.
How to Invest in Mid cap stocks
Investors can invest in mid cap stocks through a good broker. You can either invest directly using the services of a discount broker and an online trading platform. You can also consult a full-service broker such as Angel One that provides a range of services including portfolio management, wealth management, and advisory services. A good full-service broker can guide you on which mid cap stocks to buy for good returns. Once invested in mid caps, investors need to take care to constantly monitor their mid cap portfolio in order to ensure that their portfolio is indeed delivering the returns expected of it. This monitoring can include constantly watching industry trends, regulatory frameworks, and the management and corporate governance structures of the stocks they are invested in.
Conclusion
Mid cap stocks have the potential for better returns as compared to large stocks but come with increased risks too. Since December 2019, the BSE mid cap has outperformed the sensex due to a number of factors such as easy monetary policy, record FII inflows, and greater risk appetite among investors. However, investors are advised to be cautious when investing in mid cap stocks. It is better to avail the services of a reputed full-service broker to understand which mid cap stocks to buy rather than blindly following market trends.
