Mid-caps can be less volatile in the long run: CRISIL

The CNX Nifty Index, comprising large-cap stocks, returned 19 per cent in the same period, the Crisil report says

Mid-cap companies may not only be less volatile, but also offer higher returns than large-cap companies over longer periods of time, according to a report by the research arm of rating agency, CRISIL.

A study of returns over a 10-year-period has revealed that the CNX Midcap Index gave annualised returns of 23 per cent over a 10-year-period ending March 2013. The CNX Nifty Index, comprising of large cap stocks, returned 19 per cent in the same period, the CRISIL report says.

Volatility was also lower for the CNX Midcap Index compared to the CNX Nifty, it noted.

Sandeep Sabharwal, senior director, Capital Markets, CRISIL Research noted that lower volatility extends across many time periods.

"Over other periods of analysis, viz., three, five and seven years, the mid-cap index was less volatile while it outperformed the CNX Nifty Index over a five-year time-frame," he said.

Also, mutual funds with focus on smaller companies tend to be less volatile, according to CRISIL.

"Small and mid-cap equity funds were less volatile than large-cap funds across three-, five- and seven-year time frames. The former also generated higher returns over multiple periods," said the report.

Mukesh Agar-wal, president, CRI-SIL Research, suggested that greater diversification could be the key.

"While the CNX Midcap Index has exposure to 29 industries, the CNX Nifty Index constitutes 17 industries. In terms of concentration, there are only four industries with more than five per cent exposure in the mid-cap index compared to nine for the CNX Nifty Index," he said.

The mid-cap index also has a higher weightage to defensive sector stocks, which fall less during a bad market, at 23 per cent compared to 10 per cent for the Nifty. Defensive sectors include healthcare and companies with a focus on consumption.