What Are Mid Cap Stocks and How to Evaluate the Best Mid Cap Stock?

Do you remember this picture from the movie 3 idiots? Rancho stood first in class and got an opportunity to sit besides the Dean. Whereas his friends Raju and Farhan, ranking 199th and 200th respectively had to stand in the last row. The students sitting in the front row are like large cap stocks. They are market leaders with high market capitalisation. The students behind them are average students but with a potential to be future rank holders. These are your midcap and small cap stocks. Mid cap stocks are those companies who have the potential to scale up and become future large cap stocks. These stocks carry high risk but have the potential to provide higher returns.

So, What are Mid Cap Stocks?

Mid cap stocks fall between large cap and small cap stocks. These companies have market capitalisation between Rs 5,000 to Rs 20,000 crore. Securities and Exchange Board of India (SEBI) defines mid cap stocks as the companies ranking between 101st and 250th as per market capitalisation. Nifty has a benchmark index for mid cap stocks in India called the Nifty Mid cap 50 which represents the top 50 most traded mid cap stocks in the market. This index includes companies like AU Small Finance Bank, Apollo Tyres, Ashok Leyland, etc. These companies show more stability than small cap companies. They have the ability to scale up and become large caps in the long run. Investors prefer mid cap stocks as they have higher growth potential than large cap stocks and are less risky than small cap stocks.

List of Best Mid Cap Stocks

Sr. No	Company Name	BSE Scrip Code	NSE Symbol	Industry	Market Capitalization (Rs crore)
1	Crompton Greaves Consumer Electricals	539876	CROMPTON	Household Appliances	Rs 24,893
2	Escorts	500495	ESCORTS	Commercial Vehicles	Rs 18,013
3	Relaxo Footwears	530517	RELAXO	Footwear	Rs 21,715
4	Polycab India	542652	POLYCAB	Other Elect.Equip./ Prod.	Rs 19,821
5	Deepak Nitrite	506401	DEEPAKNTR	Commodity Chemicals	Rs 17,459
6	Narayana Hrudayalaya Ltd	539551	NH	Healthcare Facilities	Rs 9,365
7	Gujarat Gas	539336	GUJGASLTD	Integrated Oil & Gas	Rs 37,214
8	Trent	500251	TRENT	Specialty Retail	Rs 28,226
9	Aarti Industries	524208	AARTIIND	Specialty Chemicals	Rs 2,697
10	Sundram Fasteners	500403	SUNDRMFAST	Auto Parts & Equipment	Rs 25,369

Characteristics of Mid Cap Stocks

1. Diverse range of stocks

Mid caps have a wide range of stocks. Few of these stocks might have recently scaled up from small cap category. Hence they can provide high returns. For example, Tanla platforms limited has recently entered into mid caps and has provided a Compound Annual Growth Rate (CAGR) returns of  1,718.81% in the last year. On the other hand, few stocks might be heading towards the developmental stage and are soon to be large cap stocks. Hence they can provide stable returns. For example Torrent power - a soon to be large cap company with good fundamentals has provided an annual return of 37.14%.

2. Moderate risk

Mid caps are comparatively less sensitive to market volatility than small cap stocks. But they provide less stability than large cap stocks. Hence, they are known to carry moderate risk.

3. High growth potential

Mid cap companies are financially stable than small cap companies and hence are quick to make business decisions to grow revenue. They have the ability to take their business to the next level. Due to this, the stocks of these companies may provide good value appreciation in the long term.

4. High returns

In India, mid caps have historically generated huge profits for their investors. Apart from profits, they have also rewarded investors with dividends and bonuses.

Historical Returns generated by Nifty Mid cap index vs Nifty 50 in the last 10 years

5. High liquidity

These stocks are more liquid than small cap stocks and are often bought and sold frequently. They have a stable business model which attracts investors, thus increasing liquidity.

What Should You Look at Before Investing in Mid Cap Stocks?

1. The financial health of the company

Before making any kind of investments, it is important to check the company’s financial health. How much revenue is the company generating? How much debt does the company owe? Understand the company’s future plans and analyse their past performance. The best way to do this is by reading their annual report and analysing the financial statements. For example, if the liquidity ratios and current ratio are poor compared to industry standards, it means that the company can face monetary crunch in near future. All of these factors helps an investor understand the financial health of the company.

2. High revenue growth and earnings growth

• Revenue growth refers to the annual growth rate in revenue.
• Earnings growth indicates the health and profitability of a business after all expenses are paid.

Best mid cap stocks are the one which has high revenue and earnings. They also have the potential to provide capital appreciation in the near future. For example, in the last  five years Deepak Nitrite has provided a revenue growth of 26.09% and has earnings growth of 63.32%!

3. Management quality

Management is the backbone of a company and its performance can majorly affect the working of a business. Hence, before you invest you must carefully analyse these factors:

• Background of promoters
• Promoters stake in the business

4. High margin business

To find the best mid cap stocks to invest, you must look for a business which has high margins. Companies can have a high margin because of low competition or because of operational efficiency. For example, Relaxo footwear’s operating margins in the past years have been improving with consistency.

Relaxo Footwear	March-15	March-16	March-17	March-18	March-19	March-20
Operating margin	14%	14%	14%	16%	14%	17%

The goal should be to find such businesses and invest in them for the long term.

5. Competitive advantage

Another important criteria to find the best mid cap company is to analyse the competitive edge over their competitors. An example of such a company is Crompton Greaves Consumer Electricals.  This company has launched a unique anti dust fan and a bacteria bulb which kills up to 80% of germs. This zeal to keep innovating can differentiate them from their competitors.

Check out our video on how you can identify the best mid cap stocks to buy in India. 

https://youtu.be/DX5PdadDqSo

Alternatives to Investing in Mid Cap Stocks

If you have a high risk appetite, then you can invest in best mid cap stocks directly. Investors who do not have the knowledge or expertise in mid cap stocks, can invest in mid cap mutual funds. As per SEBI, mid cap mutual funds invest a minimum of 65% in mid cap stocks. They have historically generated higher returns than large cap mutual funds.

Historical Returns Provided by Mutual Funds

List of Top Mid Cap Mutual Funds

Mid cap fund	6 months	1 Year	3 Years	5 Years	AUM (in Rs cr)	Expense Ratio
Dsp Midcap Fund - Regular Plan - Growth	26.38%	66.34%	11.37%	17.26%	Rs 10,916.39	1.86%
L&t Midcap Fund Growth	30.25%	71.57%	7.42%	16.43%	Rs 6,428.48	1.89%
Axis Mid Cap Fund - Regular Growth Plan	30.67%	59.89%	16.95%	16.95%	Rs 10,431.65	1.86%
Motilal Oswal Midcap 30 Fund - Regular Growth	32.37%	63.28%	8.04%	11.32%	Rs 1,895.75	2.07%
Kotak Emerging Equity Fund - Growth	42.94%	90.92%	13.19%	18.29%	Rs 10,937.53	1.81%
Sbi Magnum Midcap Fund - Growth	47.16%	99.49%	10.34%	13.32%	Rs 4,887.25	2.12%
Invesco India Midcap Fund - Growth	30.71%	68.48%	12.88%	16.66%	Rs 1,389.34	2.24%
Franklin India Prima Fund-growth	37.51%	76.62%	8.93%	14.39%	Rs 7,308.00	1.87%

*This is simply the list of best mid cap funds. This is not investment advice. To conclude, every investor should make investment decisions based on their risk appetite and financial goals. Only investors with a high risk profile and long time horizon should invest in midcap stocks. These stocks are highly volatile in the short-term. Before investing do your research, check the company’s financial statements and financial ratios. You can learn a lot about  a company through its annual reports. Investors who prefer investing small amounts monthly in mid caps should instead invest via a systematic investment plan (SIP) to reduce their overall risk. I hope this article helped you understand how to select the best mid cap stocks for your portfolio. So, invest in the best mid cap stocks with Samco by opening a Demat account today.

Happy investing!