There are winners such as Sachin Tendulkar and Virat Kohli who are celebrated. And there are under-celebrated performers, like Rahul Dravid. The analogy is, large cap-stocks are the winners, with more than 70% of free-float market cap, which get the limelight. Here, we are taking the conventional definition of top 100 stocks as per free-float market cap as large-cap stocks. And there are mid-cap stocks, which have 12% to 15% of market cap, defined as the top 101 to 250 stocks. Beyond the top 250, is the universe of small-caps.
Mid-cap vs small-cap
Why are mid-cap stocks the under-celebrated winners? As per data from Nifty Midcap 150 Index Factsheet, till October 31, 2022, last five-year returns are 12.1% annualised on price return basis (PRI) and 13.1% on total return basis (TRI). Nifty 100 Index Factsheet till October 31, 2022 shows last five-year returns as 11.2% annualised on PRI and 12.6% on TRI. Over the last five years, mid-cap stocks have out-performed large-cap ones. The corresponding numbers for Nifty Smallcap 250 Index are 6.9% on PRI and 8% on TRI. Hence mid cap has outperformed small-cap by a huge margin.
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There is a Whitepaper from NSE on the Midcap 150 Index. This is till September 2021 — data is a little old but gives us a perspective. Fifteen years annualised performance data shows that Nifty Midcap 150 has delivered 15.4%, Nifty 100 has delivered 13.2% and Nifty Smallcap 250 has yielded 12.9%. Hence, over a long horizon, mid-cap has outperformed the other categories.
Remarkably, this is not at the cost of higher volatility. Over the same data period, volatility is 21.6% for mid-cap 150, 22.1% for Nifty 100 and 21.9% for small-cap 250. Better performance of mid-cap stocks has come with lower volatility. Thereafter, we look at data on a daily rolling return basis, providing for a smoothened-out comparison. Over 10 years, Nifty Midcap 150 has outperformed Nifty 100, 96.3% of the times. Over five years, the outperformance is 67.8% of the times.
Composition of the basket
What then, is the composition of the basket of mid-caps? These 150 stocks are spread over various sectors. As per weightage, financial services comprise 18.5%, capital goods 12.4%, healthcare 10.4%, automobile 8.5%, and so on. This is a more spread-out basket than Nifty 100, which is skewed towards financial services with 34% weightage. In Mid-cap 150, the stock with highest weightage has 1.94% whereas in Nifty 100 it is 9.4%.
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The other aspect to be noted is churn in the composition. No index basket, be it large or small, is static. Over the last five years, 24 stocks have moved from large- to mid-cap; i.e. the performance of these 24 companies has not been good. Over the same period, 25 have moved up from mid to large-cap basket. There is churning on the other side as well; 46 stocks have moved from mid- to small-cap and 47 have improved from small- to mid-cap.
Net-net, what are the prospects and risks in investing in mid-cap stocks? The growth in the Indian economy expected in the coming decades, which is superior to the global growth rate, will benefit companies across the spectrum. Some industries / sectors will benefit relatively more, some would benefit relatively less. Within this, mid-caps are better poised.
Being mid-sized, they have gained traction. Provided the company’s management gets it right, mid-sized companies can grow at a relatively faster pace than larger ones. The prospect is about better returns and the stock moving from mid- to large-cap category. The risk is the downward churn mentioned above; if the company does not get it right, it would slip to small-cap universe. You can go also through the mutual fund route where there is a professional team managing it, if you do not have the bandwidth to manage your portfolio of stocks.
The writer is a corporate trainer and an author