How to invest wisely in midcap segment

G Chokkalingam, chief investment officer and executive director, Centrum Wealth Management, is advising his clients to look at select stocks in the midcap segment.

A recent research report by his company showed that of the 85 scrips among BSE 500 stocks which have given more than five-fold returns in the last six years, 80 are from the midcap segment.

According to the report, stocks such as Ruchi Soya, Bata India, Emami, United Breweries, etc, have also seen their market capitalisation rising more than five times during the same period.

In the last one year, the Sensex has fallen 2.17 per cent, while the BSE midcap index has risen 2.08 per cent. And, there is scope for value picking that can yield good returns.

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However, investing in midcap scrips is rather tricky, as the segment is volatile and not known to give consistent returns. Retail investors are generally asked to stay away from these.

Yet, Chokkalingam is enthused about good quarter results and foreign institutional investor inflows that should see the market rise. "At the present level, there is enough value buying opportunities in this segment," he says.

However, he cautions that investing in midcap scrips is for investors with high-risk appetite only.

Midcaps are high beta stocks, which mean that they will outperform the Sensex or the Nifty in a rising market. And, in a falling market, these would fall just as sharply.

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Seeking help

For a retail investor, it is always advisable when directly investing in midcap stocks to take professional help rather than going on tips from friends or brokers.

Also, given the volatility in the segment, one should allocate only a small portion of their portfolio to midcap stocks.

So, invest about 20 per cent in select midcap stocks while investing the rest in largecaps. Keeping it small and starting small will help.

If you think you have made a mistake, it is easier to book losses and get out.

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Time horizon

When it comes to investing in a midcap scrip, doing so for the right time horizon is important. Always enter a midcap stock with a minimum time horizon of one year.

According to Prashanth Prabhakaran, president, Retail Broking, India Infoline, a shorter time frame in a volatile market may not get you the returns you expect. Plus, it will amount to timing the market, which is no easy task for the retail investor.

"A three-five years time horizon for investing in a midcap is good, as it takes at least this much time for them to give good returns," says Prabhakaran.

MRF Tyres, for example, the stock in 2005 was trading at Rs 2,622 and now (six years later) is at Rs 7,116.

Except for 2009, the scrip has given positive returns on all five years. GSK Consumers is another stock that has zoomed over the last six years. Bata India has risen 60 per cent during this period.

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Betting on fundamentals

While looking out for possible midcap stocks to invest in, one must read the balance sheets of these companies carefully.

Look for companies that have a good management and corporate governance.

"Also, look at the valuations of these companies. If they are trading at a lower price to earnings value than their peers, understand why it is so. Also, look at the future growth plans of the company," adds Prabhakaran.

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Sector-specific buys

Staying away from speculative sectors such as real estate and infrastructure, and even new listings, is Radhika Gupta, director, Forefront Capital's advice.

According to Gupta, "Pick up safer sectors such as pharma, auto and fast moving consumer goods, which are not speculative in nature and have a long standing track record when value picking stocks in the midcap segment."