Mid-cap enigma

Mid-cap enigma

Mid-sized companies generally grow faster than larger ones given their small base of revenue and profits. It would be extremely difficult for a large company to match the growth rates of a mid-sized company in its growth phase. Can you imagine a Reliance Industries or Hindustan Unilever matching the scorching pace of Educomp Solutions? Consider this: Since 2003, Educomp Solutions’ profits have grown at an annual rate of more than 128%, from Rs2.43 crore to more than Rs150 crore in 2008. An unusually rewarding investment from an unusual business—online education.

Another example is Titan Industries Ltd. In 2003, when its profits were on a downward spiral, Titan Industries reconfigured its business with a new line of products and aggressive marketing. Since then, it has grown its annual profits by 88% , from Rs6 crore in 2003 to nearly Rs100 crore now. The key success factor for these companies is their size, or rather the lack of it. It is their small size that makes it possible for them to grow at a breakneck speed. But herein lies their weakness, too. Even a slight turbulence in the economy can send these companies on a downward spiral.

Also see Large vs Mid (Graphic)

Instances of small companies growing at a pace of 100% or more are numerous but so are the examples of companies which have shut or are embroiled in legal battles with shareholders. There are many instances where a mid-cap company, touted as the next market leader, is currently nowhere to be seen. So, any talk of mid-cap companies has to be taken with a pinch of salt. The risk of investing in mid-cap companies is considerable and it requires a great deal of patience to stay invested in them. But if you are convinced that you have narrowed down on the next Infosys, then go ahead and buy that stock.

As mid-caps are more volatile in nature compared to their large-cap counterparts, many funds at the start of this year have reoriented their portfolios to accommodate larger companies to help tide over this unpredictable market. But there are some which have maintained their mid-cap focus. These funds are better options than investing directly in such stocks as they can shield investors from the vagaries of market fluctuations. A fund typically invests in a number of stocks across a range of sectors. In such a portfolio, if a company or sector fails, the gains from others can help the fund cope. Hence the diversification offered by these funds cannot be imitated by a single investor.

Having said that, it is a tough task for the fund manager. He has to constantly cope with issues such as liquidity and ethical practices. It could happen that the company he is betting on goes down under. These funds also tend to be handicapped by their initial successes. When they are performing well, investors pour more money, and this could lead to their downfall. With additional inflows, the smaller investments now fail to make a large impact on the returns.

Yet, some of the largest funds in the equity diversified category are in this segment. Of the subset of mid-cap funds, we narrowed down on three aspects: those with assets more than Rs150 crore, in existence for at least three years, and the best among their peers in terms of performance. Remember that investing in these funds is not without risk. In the bear run (8 January-15 July), these funds have eroded 43% of investors’ money, but compared to the 47% fall in BSE Mid Cap Index, they have not fared too badly. Ultimately, it’s all about perspective!