Midcaps can be less volatile in long run: Crisil

The CNX Nifty Index, comprising of large cap stocks, returned 19% over a 10-year period ending March 2013

Midcap companies may not only be less volatile but also offer higher returns than large cap companies over longer periods of time.

A study of returns over a ten year period has revealed that the CNX Midcap Index gave annualised returns of 23% over a 10-year period ending March 2013.

The CNX Nifty Index, comprising of large cap stocks, returned 19% in the same period according to a report by the research arm of rating agency Crisil.

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 a 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 Agarwal, President, Crisil Research suggested that greater diversification may 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 5% exposure in the mid-cap index compared to nine for the CNX Nifty Index,” he said.

The Midcap index also has a higher weightage to defensive sectors, which fall less in a bad market, at 23% compared to 10% for the Nifty.  Defensive sectors include healthcare and companies with a focus on consumption.