The best bet in Stock Market: “MIDCAPS”

The small and midcap rally is taking root in an unprecedented way in the Indian stock markets. High liquidity, decent valuations, good prospects are contributing to this phenomenon. Many people are suspicious of the manner in which small and mid-caps stocks have run up lately. However, those claiming to be value investors believe that small and midcaps truly holds tremendous future for long term investors. Both maybe deemed correct depending upon ur risk appetite and investment horizon. Amidst great volatility in the past 7 years, I have discovered that investments in midcap stocks have given much higher returns than large cap stocks provided investors held on to their investments amidst the occasional panic. Also investors should have bot stocks in companies with genuine business model and at reasonably low valuations.

If simple criteria like low PE multiple, good promoter background, genuine business operations and a reasonable dividend yield are followed for stock picking. It is unlikely that an investment would go wrong over a 2-3 year time frame. Those who burnt their fingers in the tech bust of 2000 and the IPO boom of 1994 would recall that most of their money was lost in chasing stocks that quoted at a high PE multiples with no dividend track record and doubtful promoter groups. One of the most reliable methods of checking whether a company has genuine operations is to find out how much income tax and other taxes it pays, if a company is paying taxes then there is more likely that its business would be genuine. In addition, if the company is known for its promoters or products, then investors can be more comfortable while investing. It seems likely that in the months ahead, broader indices like Sensex and Nifty may not make significant moves, while midcap stocks could show more activity. This would attract attract retail investors and HNI individuals to invest in these companies.

While it may be advisable for small investors to look at midcap stocks for more gains, they would need to follow a disciplined approach and remain cautious. Small and Midcap stocks are highly prone to sharp falls when the mood turns bearish. In bad times if the indices fall 10% the midcap stocks can fall upto 25%. And the worst part is that volumes in these counters dry up when prices fall. Therefore small investors panic and exit their investments at huge losses. Sometimes they make not exit the investment and see the company completely vanish. My advice is that if u have invested in a genuine company with good promoters and a long track record, then short term volatility should not cause panic. Even if we look t huge falls in September 2001 or in April 2004, stock prices have climbed back to more reasonable levels within a short time.