Mid caps stocks and mid cap funds are going through a churn at four levels. First and foremost, the dividends of cheap oil are no longer there and that is impacting the value of mid cap stocks and mid cap funds in a big way. Secondly, we saw in the case of stocks like Manpasand, PC Jewellers and Infibeam; mid caps are the most vulnerable to any issues like corporate governance, disclosure standards and transparency. Not to forget, the weak rupee and higher yields are hitting mid caps on their margins and their financial solvency. Last but not the least, mid caps has also taken a big hit on the valuation front and despite the sharp correction; many of these stocks are still quoting at fancy valuations. So what should you be your fund strategy? Should you do some value digging in mid-cap funds or should you look to stay with the safety of large caps. One answer could be to look at multi-cap funds which combine the stability of large caps with the exponential growth potential of mid caps. But will come back to that later.
Your fund strategy – Mid cap funds versus large cap funds versus Multi-cap funds
We often get to hear extreme views in the market about mid cap funds. In fact, even the approach adopted by investors is either to get too aggressive on mid cap funds or stick to the safety of large cap funds. The truth obviously lies somewhere in between. Your mid cap fund strategy should be predicated on your capability to separate the wheat from the chaff? While mid cap funds will continue to be intrinsically risky, the current lower valuations give a level of comfort. Here is a strategy term sheet for you to follow with respect to mid cap funds versus large cap funds versus multi cap funds…
- Be careful of the funds where the NAVs have been falling vertically and the companies in the portfolio are beset with larger problems of corporate governance. Infibeam, Manpasand, IL&FS, DHFL; obviously have larger inherent problems and mid cap funds having such stocks in their portfolio are not great ideas. There is no smoke without fire and there is a fire somewhere in these stocks. But if you are looking at above average returns, then mid caps hold the potential to become the large caps of the future.
- Focus on mid cap funds that have held value in bad times. They have obviously got their stock selection, stock review and stock rebalancing better than others. When the entire mid cap space has corrected nearly 20%, there must be funds that have just corrected just about 6-8%. Find the story behind this strength and stick to strong mid cap funds in these kinds of markets. These are the stock that will shoot up once the markets reverse.
- Mid caps, large caps or small caps; profitability and margins can rarely be wrong. Focus on portfolios where stocks are generating cash flows. When combined with scale, you have a winning a recipe for a long term wealth creator. It is mid caps like Lupin, Britannia and Havells that became multi-baggers in the last 10 years.
- Instead of deciding large caps versus mid caps, use the opportunity to restructure your portfolio. Don’t worry about booking losses; that is part of the game. What matters is that you are freeing up liquidity that can be fruitfully deployed in other funds with better potential. That should be your basic principal with respect to mid caps at this point of time.
- Your choice between large caps and mid caps must be based on your overall risk capacity. Investors with a larger risk appetite and risk capacity can afford to take the risk of a bigger exposure to mid cap funds but conservative investors should ideally stock to large cap funds as mid cap funds may be too volatile for their liking.
- Finally, don’t miss on this category called multi-cap funds. These are a combination of mid cap and large stocks and give you the best combination of growth and stability. With the superior stock selection of the fund manager, the multi cap fund is able to delivery relatively higher returns than large cap funds but with relatively lower risk compared to mid caps. That is where multi cap funds really fit into your portfolio.
