Testing the midcap mettle

The midcap segment has outperformed the broader equity market indices, giving most retail investors an opportunity to make quick bucks. However, picking up these stocks blindly could result in losses, warn market men.

The equity markets had started moving up since mid-March, and have now reached the consolidation phase. Over the same period, the Bombay Stock Exchange (BSE) midcap index moved up by 12 per cent and the CNX midcap index by 11 per cent. Meanwhile, the benchmark indices on both BSE and the National Stock Exchange moved up by eight per cent.

In terms of the advances seen, 267 of the 284 scrips in the BSE midcap index advanced, while only 17 declined, since the broader markets began rising. In the same period, only eight of the 100 CNX midcap stocks declined.

Typically, the high beta stocks in midcap result in the segment outperforming the Sensex or the Nifty in a rising market. In a falling market, these would fall just as sharply.

The broader markets are expected to rise on the back of good last quarter results and increased foreign institutional investor inflows. This should result in the midcap segment appreciating, too. Investors should watch out for value buying opportunities in the segment.

However, given these stocks are not as well-researched as the largecap ones, market experts advise retail investors to invest a maximum of 10-15 per cent of their total portfolio in this segment.

Investors wanting to make direct investments in such stocks should seek professional help, since one needs to look at individual stock’s fundamentals rather than just the momentum. The other route for investing in midcap stocks is through a midcap mutual fund.

However, a number of such funds themselves have a higher exposure to large market caps stocks rather than the midcap segment. Funds that bet on potential smallcap stocks are likely to reflect the market movements — winners during the good time and losers during a fall in the markets.

One could opt for a midcap fund with excess exposure to largecaps or go for a scheme with a higher risk-taking ability. Ensure the scheme should be suitably diversified, both in terms of sectors and stocks.