Largecap stocks in last five years have been doing as well as midcap stocks in terms of returns. While BSE 100, a largecap index, gave a five-year return of 8.1% on a CAGR basis, NSE CNX Midcap only managed to give a slightly better return of 8.3%. And given the relatively higher volatility witnessed in midcap stocks, on a risk adjusted return basis, it seems investors have a strong case to stick to largecap stocks.
However, this is just a recent trend. If one were to look at a very long-term horizon of 10 years, then midcap stocks do manage to outperform largecap stocks. According to an FE research, While CNX Midcap gave a 10-year CAGR return of 25%, it was lower at 18.5% for BSE 100.
This trend indicate that investors into midcap stocks certainly need to stretch the investment horizon, if they have to better their portfolio returns. Currently, industry data indicates that an equity fund investor has an average investment horizon of 2 years. This probably has to stretch to more than five years if he has to ensure better returns from midcap investments.
Historically, it has been seen that midcap indices outperform largecap indices. This is because on a small earnings base, midcap companies could move on a faster growth trajectory than that of largecap companies. This in turn could give such midcap companies a higher price earning multiple. In contrast, a largecap on a higher earnings base, might not grow at a faster clip, thereby limiting its share appreciation potential. But over the last five years, there has been mixed trends, with many large cap firms putting up a good show.
For the current year till date, BSE 100 has given a negative return of 11% and it was a negative 11.6% for CNX midcap. During calendar years 2009 and 2010, CNX midcap outperformed BSE 100. In 2005 and 2006 largecaps outperformed midcap returns.