The midcap index hit high of 21840 level in January 2018. Since then it has been on a downhill leading to frustration among investors. At present, the index is quoting around 15500 odd levels. The midcap index is down almost 30 per cent from its peak. Investing in midcap space is risky. In a bull market, midcap stocks outperform the benchmark by a wide margin, but as soon as bears show up, they fall like a pack of cards.
Abhinav Angirish, investment advisor, says “Historically, midcap funds have delivered 16 per cent returns over a 10-year period. Even though they are risky, they are also wealth creators. They suffer from valuation distortion. The investor investing through Systematic Investment Plan (SIP) stands to benefit in the long term.”
Many financial experts agree that midcaps have larger potential to deliver better returns as compared to large cap stocks. Midcap stocks are tracked by very few analysts. The lack of research thus creates a valuation gap. Many midcap stocks are trading below their fair value. These stocks have tremendous potential to rise in terms of price and fill valuation gap. Midcap funds offer excellent opportunity to participate in wealth creation while hedging risk.
An average investor usually has a very short-term perspective on the market. Ideally 30 per cent fall in the index is a sign of impending turnaround in market cycle. When the average investor acts in panic, the fund manager becomes wise. Long-term outperformance of the fund is a testimony to this. In the short term, the fund might underperform or even yield negative returns. But in the long run, the fund outsmarts the benchmark in terms of returns. Investing in midcap stocks is all about beating the benchmark in the long term.
Many first time investors are unhappy with the performance of the midcap funds in the past two years. Nobody likes to see their portfolio bleeding, it makes the investing process ever confusing. But investors must remember that sharp corrections offer wealth-creation opportunity. Instead of panicking and exiting, investors should be patient and hold a long-term view. Many investors get caught on the wrong side of the market during volatility.
Instead of getting carried away, the solution is to invest in a systematic manner; either through SIP or conducting extensive research.
Now, the queation arises, “How much and when to invest in midcap space?.”
There is no thumb rule for investments. Every investor must carefully assess his risk appetite and strive to diversify his portfolio. Ideally 35-40 per cent of investment corpus should be invested in midcap funds. Midcap play is not for the faint-hearted. Any investment in midcap funds must be made keeping a long-term view, ideally 8-10 years. Midcap space can help you achieve your long-term financial goals with ease. But if you expect short term returns, it would only end in disappointment.
Remember investing is about dealing with uncertainties. The better equipped you are in terms of knowledge, better are your chances of success. Instead of treating investments as do-it-yourself thing, you should seek help of professional financial advisor. The professional background puts them in a better position to analyse risk appetite. The investment strategy suggested by them will help you achieve your financial goals smoothly.
The author is the founder at Investonline