Investing is all about your perception of the risk. When interest rates are low, your capacity to take risks is higher. It is commonly called ‘risk appetite’ in the market. The Reserve Bank of India left borrowing rates unchanged last Friday. But the RBI will continue to adopt an ‘accommodative’ credit policy stance to support economic growth. That is despite consumer price inflation hovering over 7 per cent.
The credit policy is supposed to target inflation in the economy and keep it in check. However, RBI contends that consumer prices are higher due to the supply-side bottlenecks created by lockdowns across states resulting in restrictions on the free movement of goods. Amidst such a backdrop, 2021 appears to be a year when mid-caps would do better.
Stock market regulator Securities and Exchange Board of India defines large-cap, mid-cap, and small-cap shares based on their market capitalisation. In this system, the top 500 companies are ranked according to their market capitalisation. Companies through rank 1 to 100 are large caps. From 101 to 250, they are class are mid-caps and 250 and below are small caps.
The interest in the mid-cap shares has intensified over the past month-the Nifty Midcap 100 index jumped over 25 per cent during the period. Relatively, mid-cap shares have underperformed frontline shares represented by the NSE Nifty over the past three years. The interest in midcap shares now is due to a sharp run-up in large caps fueled by flows from foreign portfolio investors.
Investors have access to cheap money, and they are ignoring the most brilliant fall in growth in the quarter ended June 2020. Having contracted in the September 2020 quarter, India’s economy is in a recession. That is if you go by the definition of two successive quarters of contraction. However, share prices today are a function of tomorrow’s profits. Investors are betting on the future recovery. The economy is expected to get out of the recession sooner rather than later and corporate profits are likely to be back on track for the year ending March 2022, a good 15 months from now.
You may notice mutual funds promoting schemes that allow you to invest in mid-cap companies. Their assessment is based on some long-term trends. Mutual fund managers and analysts argue that investors should be mindful of a long-term trend where mid-cap companies outperform large-cap ones during the high growth phase. If India sees a V-shaped economic recovery, mid-cap companies in sectors like auto-components, consumer goods, engineering and capital goods, and technology are expected to grow profits faster than large-cap companies over the next two years.
“Many smaller companies have adapted and embarked on prudent cost-cutting measures and cleaned up their balance sheets by reducing debt,” said a note put out by Motilal Oswal Asset Management.
What can you do Individual stock investing in mid-cap companies may be tricky. You may want to take professional help for the purpose. Identifying a stock to invest in needs a lot of reading and analysis. There is limited professional research on companies with lower market capitalisation.
You may have to rely on media reports, financial statements of these companies like the annual reports and quarterly result releases. A reading of the management discussion and analysis in the annual report will give you an overview of the market and the environment the company operated through the financial year. However, it would help if you had someone to tell you that it is the right time to buy a particular stock. A professional analyst is your best bet. It is their job to analyse the fundamental data of the company. These analysts usually work with stockbroking companies.
So if your broker sends out research reports, do read them regularly to get a sense of the trend. The other option is to invest through mutual funds. Let them do all the analysis and determine the right stocks to invest your money. A systematic investment plan of a mutual fund scheme that invests in mid-cap stocks could be a good idea for 2021. Your long-term savings have to find their way into companies that are smaller today, but could grow big tomorrow.
(The author is editor-in-chief at www.moneyminute.in)