As investors search for multi-baggers in the stock market, there is one area they frequent the most - mid-caps. In a growing economy, mid-caps often tend to outperform. So, it is no coincidence that over a ten year period, there is one clear winner among Indian equity funds: mid-cap funds. Mid-cap funds with a 16.35 per cent CAGR have beaten all others categories such as large-cap, flexi-cap, multi-cap and even small-cap schemes. As a result, mid-caps have emerged as a must-have for any superlative wealth creation journey. Over long term, mid-cap stocks have compounded meaningfully and enhanced the wealth creation journey of investors.

 

We can easily see this in the last 5 years when out of the top 500 stocks listed; the mid-cap segment has contributed a significant number of multi-baggers. In a growing economy, mid-caps tend to do well compare to large-caps. Structural reforms and good policy measures such as PLIs, Insolvency & Bankruptcy Code, Corporate Tax Rate, GST and Land reforms, bode well for an economy in terms of growth. This in turn has a positive impact on mid-caps. The Union Budget 2021-2022 clearly showed the government's intent to bolster growth with a projected increase in capital expenditure and spending which may lead to increase in demand.

 

This, again, in turn, is beneficial for mid-caps. With correction in mid-cap space in the last couple of years compared to large-cap space, the frothiness in mid-cap valuations appears to have subsided. Over the last two years, mid-caps have risen by 6.6% compared to 11.5 per cent for Nifty50. Low interest rates now create a conducive environment for mid-caps, as the cost of capital – a key driver of profitability for high growth mid-sized companies - comes down. When it comes to choosing a midcap fund, in the current market environment, the ideal mid-cap fund will have a portfolio of well-researched companies with distinguished moat will lay strong emphasis on re-rating candidates based on cyclical recovery/macro changes.

 

One of the distinguished funds in this category over the past few years has been the ICICI Prudential Midcap Fund. On a risk-adjusted return basis, the fund regularly features among the best performers in the midcap category. The Author is Managing Director, Big Bull Capital Services Pvt Ltd.