What are Mid-Cap Stocks? Features, Benefits, and Risks Explained

Based on market capitalisation, companies are divided into three key categories - large-cap stocks, mid-cap stocks and small-cap stocks. The market capitalisation of a company gives an idea about the size of the company. 

Mid-cap stocks are companies that fall between large-cap and small-cap categories of stocks. In the article, we will explore if midcap stocks are ideal for investing by focusing on their features, advantages and disadvantages.

What are Mid-cap Stocks? 

The market capitalisation of a company suggests the value or worth of the company. It is determined by multiplying outstanding shares with the price of each unit. Mid-cap stocks’ market capitalisation falls between Rs 5,000 crore to Rs 20,000 crore. While large-cap stocks form the top 100 companies on the stock exchange, mid-cap stocks are listed at 101-250.

Based on market capitalisation, here’s a classification of the stocks:

Companies which belong to the mid-cap category are generally in their growth or expansion phase. They are expected to show a faster uptrend in profits and market share, which could lead to increased returns. This is what makes them attractive to investors. That said, investors must understand that these companies are more volatile than large-cap stocks, hence they are considered to be riskier.   

Indian stock market has a benchmark index for midcap stocks called the Nifty Midcap 50. It tracks the 50 most-traded mid-cap stocks. 

Features of Mid-cap Stocks

Here are some of the key features of mid-cap stocks:

Diversity: Mid-cap stocks lie between large-cap and small-cap stocks and vary widely in terms of risk and return. Some mid-cap companies are in the early stages of growth and provide stability to the portfolio while others have the potential to offer higher returns but also carry a higher risk quotient.

Scope of High Returns: Mid-cap companies are generally in an expansion phase and looking to expand productivity, market share and profitability. This can help them generate higher returns compared to large-cap companies which are leaders in their fields.

Risk: Mid-cap stocks carry moderate risk but are less volatile than small-cap companies. Mid-cap stocks are less affected by volatility in the stock market due to their substantial capital base, which helps them withstand adverse market conditions.

Liquidity: Mid-cap stocks have lower liquidity than large-cap stocks as they have a lower demand due to their risky nature.

Who Should Invest in Mid-cap Stocks?

After considering the features of mid-cap stocks, here is a look at the investors who can look to invest in these stocks:

• Investors who are looking for faster capital appreciation can consider mid-cap stocks as these companies have the probability to become large-caps in future, generating solid returns for investors.
• Investors who have a long-term investment horizon and can withstand volatility in the near term can add mid-cap stocks.
• Investors who have a higher risk tolerance can invest in mid-cap stocks as they have moderate volatility and may perform poorly when the market falls.

Advantages of Investing in Mid-cap Stocks

Mid-cap stocks are a great choice to diversify a portfolio as they offer a middle ground between large-cap and small-cap stocks. While they are less volatile than small-cap stocks, they still have huge opportunities for growth. 
Adding mid-cap stocks to your portfolio can provide you with the following advantages:

• Return Potential: Companies that belong to the mid-cap category are in the growth phase, and looking to expand their market share and profitability. This increases their ability to generate higher returns for investors.
• Innovation and Agility: As compared to their larger peers, mid-cap companies are more innovative and agile. This means that they can adapt quickly to market changes and tap new opportunities to grow.  
• Balance Risk Profile: Mid-cap stocks are less volatile than small-cap stocks as they have a bigger asset base. This makes them more stable during difficult market conditions.
• Affordability: Mid-cap stocks are less discovered during their initial days by investors and large institutional players, making them more affordable. 
• Access to Information: Mid-cap companies provide better disclosures, financial summaries and history to investors, unlike small-cap firms. This helps investors analyse stocks on various metrics like profitability, debt, market share etc. and make better financial decisions.

Risks of Investing in Mid-cap Stocks

Mid-cap stocks may offer higher returns than large-cap stocks but they also carry higher risk. Here are some of the risks of investing in mid-cap stocks:

• High Risk: Mid-cap stocks are more volatile than large-cap stocks. Mid-cap companies’ share prices move quickly in a short period. This can result in huge gains when the stock market goes up but also huge losses when the market heads downwards.  
• Low liquidity: Mid-cap stocks have lower liquidity than large-cap stocks. Investors may face difficulty to buy or sell them in large volumes. 
• Market Sensitivity: Mid-cap stocks tend to perform better when the economy is doing well. Long phases of economic downturns may pose a challenge to their financial stability.
• Limited Resources: Mid-cap companies have fewer resources available to them than larger companies. This could impact their ability to weather difficult market conditions and economic downturns. 

Alternative Investment Options to Mid-Cap Stocks

If you have a lower risk appetite but want assured returns, then here are some alternative investment options to mid-cap stocks:

• Sovereign Bonds: These bonds are issued by the government and are one of the safest investment options available. Sovereign bonds provide a fixed return over a period of time. 
• Debt Funds: These are the funds that invest in bonds, debentures and treasury bills. They carry low risk and offer steady income to investors.
• Balanced Funds: These funds invest in both debt and equity. They are a great option to diversify your portfolio and earn moderate returns.
• Large-cap Stocks: Investing in large-cap stocks can provide investors with stability and dividend income. 

Conclusion

Investing in mid-cap stocks offers a chance to investors to diversify their portfolios and see significant capital appreciation. But investing in mid-cap stocks is not without risks. To mitigate this, investors can analyse the company’s financial health, management and economic trends before investing in mid-cap stocks. You can also consult market experts and your investment advisor to find the right investment mix that meets your financial goals.

FAQs