Where to invest: largecaps, midcaps or smallcaps? That’s the question investors keep wrestling with most of the time. The question has become all the more relevant in the current market, where the indices are trading near their high points. There is empirical evidence that in the runup to each market peak, valuations of smaller companies tend to inch closer to those of their largecap counterparts.
Among all the stocks traded on markets around the globe, it’s usually the
stocks that make the biggest headlines. These companies are well known, have bigger business clouts and, consequently, end up being in most investors’ portfolios. Largecaps tend to be more mature companies, and are thus less volatile in rough markets, as investors fly to quality names as become more risk averse.
Largecap stocks provide stability in return on investment, if one stays for a longer duration. However, the blue chips are not necessarily always the best choice for investors looking for above-average returns. They may need to invest in midcap and smallcap names.
Midcap and smallcap stocks belong to emerging companies, which have the potential to grow and become largecaps. Such stocks tend to outperform largecaps in certain periods, depending on the economic growth or market cycles.
In the context of the Indian market, with corporate earnings bottoming out, it’s the right time to invest in midcaps. Actually, there is a perception that midcap stocks are riskier because of their size and liquidity constraints. Many a time, midcaps are under-researched and, therefore, more likely to be priced wrongly. Investors, however, can benefit from this by identifying potential winners early.
Building a diversified portfolio requires investing in a mix of large, stable corporations and smaller companies with growth potential. However, it can be a daunting task for retail investors to gather and go through all the data available on specific smallcap and midcap names to discover the opportunities.
The most important factor to consider while investing in a midcaps is management quality. Besides one needs to look at its cash flow patterns, level of debt, promoter share pledges and opportunity size, market share and competition and other business interests of the promoters.
It is always wise for retail investors to invest in companies across market-caps. One should recognise the risk profile of the business, understand her own risk appetite and then decide whether to invest in a largecap, midcap or smallcap.
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