Mid-size companies generally grow faster than larger ones, given their small base of revenue and profit. It will 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, this company has grown its profits at an annual rate of more than 128 per cent, from Rs 2.43 crore to over Rs 150 crore in 2008. An unusually rewarding investment from an unusual business - online education. As of now, it seems well poised to sustain its growth.
Titan Industries is another exmple. In 2003, when its profits were on a downward spiral, it reconfigured its business with a new line of products and aggressive marketing. Since then, it has grown its annual profits by 88 per cent, from Rs 6 crore in 2003 to nearly Rs 100 crore now.
The key success factor for these companies is the 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; slightest turbulence in the economy can send these companies on a downward spiral.
There have been many instances when a mid-cap company has been touted as the next market leader but is currently nowhere to be seen. So, any talk of mid-cap companies has to be taken with a pinch of salt. Many times it has happened that a company had everything - capital, product, management, investors and a market for its goods, but still failed to do the very thing everybody expected it to do - grow, grow grow!
During the tech bubble Pentamedia Graphics and Silverline Technologies were the darlings of the market. They used to be traded at over Rs 1,000 per share, now they are penny stocks. Recently, 35 companies, classified as mid-caps in December 2007 have shrunk down in market capitalisation to become small-caps.
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 please go ahead and buy that stock. The rest, who are limited by lack of resources or such knowledge, can take the mutual fund path.
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When it comes to mutual funds, there is lot confusion regarding the definition of a mid-cap, with each scheme throwing up its own interpretation. Some define it as those with market capitalisation between Rs 150 crore - Rs 1,500 crore. Others use a much more dynamic approach such as stocks whose market capitalisation does not exceed the fiftieth or the thirtieth stock by market cap of the National Stock Exchange or Bombay Stock Exchange. Another way to define mid-caps are stocks accounting for 20 per cent of total market cap below the large cap, which accounts for the first 70 per cent.
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 ride over this unpredictable market. But there are some who have maintained their mid-cap focus.
These funds are better options than directly investment as they can shield the investors from the vagaries of the 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. Unlike the large-cap universe, mid-caps constitute over 2,000 stocks. Hence, the choice set for the fund manager is quite large and it requires skill and judgment.
The fund manager has to constantly cope with issues like liquidity and ethical practices. It could quite be the case that the company he is betting upon goes down under. These funds also tend to get handicapped by their initial successes. When they are performing well, investors pour more money into them 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 - Reliance Growth, Reliance Regular Savings Equity, to name a few. Of the subset of mid- cap funds, we narrowed down on three aspects: Those with assets over Rs 150 crore, in existence for at least three years, and are the best among their peers in terms of performance.
Just remember that investing in these funds is not without risk. In the bear run (January, 8, 2008 - July, 15, 2008) these funds have eroded 43 per cent of investors' money, but compared to the 47 per cent fall in BSE Mid-Cap Index, they have not fared too badly. Ultimately, it's all about perspective!
Value Research