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As an equity investor, you may come across companies marked as large-cap, mid-cap, and small-cap shares. These are market capitalisation-based designations and are used to characterise the size, stability, and growth potential of a business.
While large-cap shares are typically thought to be more stable and small-cap shares riskier, mid-cap shares fall between, offering an element of both. Understanding what a mid-cap stock is and its growth potential will allow you to make more informed decisions.
Market capitalisation (Market Cap) is a fundamental metric used to determine a publicly traded company's total value. It's calculated by multiplying the company's current share price by the total number of its outstanding shares.
Market cap is a crucial indicator of a company's size and is often used by investors to assess its overall value, potential risk, and growth prospects.
Mid cap stocks belong to companies that fall in the 101st to 250th range by market capitalisation. They often represent businesses with high growth potential that are in the expansion phase. They are companies in a growth phase, bigger and more stable than small-caps. But, they are not as established as large-caps.
Mid-cap stocks offer a unique combination of growth potential and relative stability. Here are their main advantages:
Since mid-cap companies are still scaling, they may offer significant capital appreciation. This is possible if they successfully expand their market share, launch new products, or enter new locations.
Mid-cap stocks are sufficiently flexible. Compared to large-cap stocks, they offer greater agility, which is particularly beneficial during economic downturns.
Compared to large caps, mid-cap stocks are frequently not as well-researched. Stocks may be mispriced as a result, presenting opportunities for those who conduct careful research.
Mid-cap stocks may draw attention when they are included in indices such as the Nifty Midcap 150. It may have a favourable effect on their value.
You can diversity your portfolio's equity component by investing in mid-cap stocks. They offer exposure to emerging leaders and specialised industries.
While mid-cap stocks can offer attractive returns, they also come with distinct risks. These include:
Mid-cap stocks are sensitive to macroeconomic shifts and may exhibit higher price volatility. This change may be seen during periods of market stress, monetary policy changes, or geopolitical events.
Some mid-cap stocks may have lower trading volumes, which can result in wider bid-ask spreads. It can affect the ease of entry and exit at desired price points, lowering liquidity.
Mid-cap companies may not receive the same media attention or analyst coverage as large-cap firms. This makes it harder to obtain detailed, reliable information to support informed decisions.
Due to their smaller financial buffers, mid-cap companies may find it harder to handle economic downturns or sector-specific slowdowns compared to their large-cap firms.
As businesses grow, their compliance needs increase. Some mid-cap firms may struggle with governance standards or operational scalability.
Mid-cap stocks can play a strategic role in a diversified equity portfolio. Depending on your financial goals and risk tolerance, you can adjust exposure to these stocks.
They offer an appealing mix of risk and reward with medium to long-term horizons. If you can tolerate a high risk appetite and your investment style is aggressive, you can allocate up to 30% of your funds to mid-cap stocks.
Risk Profile |
Large Cap |
Mid Cap |
Small Cap |
Debt / Others |
|---|---|---|---|---|
Conservative |
60% |
20% |
0% |
20% |
Moderate |
40% |
30% |
10% |
20% |
Aggressive |
30% |
40% |
20% |
10% |
Note: These are illustrative examples only and do not constitute advice.
Many investors actively and passively manage mutual funds that invest in mid-cap stocks. These funds provide access to a curated set of companies and may suit you if you prefer indirect exposure.
Mid-cap stocks represent a crucial middle ground in the equity market. They offer growth opportunities that may be absent in more mature large-cap companies with less risk. However, they come with risks, including market volatility, limited liquidity, and less transparency.
If you are seeking a balanced approach to portfolio construction, you may find mid-caps a valuable component.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Sources
https://www.sebi.gov.in
https://www.nseindia.com
https://www.amfiindia.com
https://www.investopedia.com/mid-cap-companies-advantages-and-disadvantages-5224695
https://www.americancentury.com/insights/dont-overlook-mid-cap-stocks/
A mid-cap stock refers to a company ranked between 101st and 250th in terms of market capitalisation, as defined by SEBI.
Mid-caps are generally more stable than small-caps and offer higher growth potential. It positions them in the middle in terms of risk and return.
They can be, depending on your risk tolerance and investment horizon.
This depends on your market knowledge, experience, and ability to research. Mutual funds offer diversification and professional management.
It is an index that tracks the performance of 150 mid-sized companies listed on the NSE. It serves as a benchmark for many mid-cap mutual funds.
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Posted on 05 Jun
Geetanjali Lachke
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