Mid-Cap Funds: Markets Sweet Spot

In investments, there is always a trade-off between risk and return. Higher the risk you take, higher will be the return. As an investor you ought to take decisions based on what is the return that you are expecting to get for every additional risk you take. You take as much as risk till the time it is adequately compensated by better return. As such, mid-cap investment is sometimes considered to best serve this purpose. In fact, mid-cap stocks are believed to be the market’s sweet spot. They are positioned in a way that gives them the potential to generate impressive riskadjusted returns.

Mid-cap sized companies are not as vulnerable as small-cap companies in terms of economic shock and business operations. They are better equipped to handle any adverse economic condition as they have stable business operations and good cash flows. In addition, their growth potential is not hampered by their size. Large-cap companies take time to manoeuvre their operations with changing business scenarios while mid-cap companies are more agile, able to exploit any opportunity and are well-equipped to scale up their business and have good growth potential ahead.

These factors help such companies to generated best risk-adjusted returns among all other capitalisation companies. Our cover story in this issue goes in detail about how investments in mid-cap funds have generated superior risk-adjusted returns historically. Nonetheless, mid-cap funds are not ‘all season’ investment. There are couple of things that need to be considered before investing in mid-cap funds. First, you should have a long-term investment horizon i.e. at least 5-7 years and you should be prepared to take moderate risk. Further, mid-cap funds should be part of your satellite portfolio and should be allocated to long-term goals.

SHASHIKANT