Midcap Analysis

29.09.22 08:23 PM - By Nikhil Tandulwadikar

Did you know! From its lows in 2001 the midcaps grew over "14 times" over the next 6 years?

Before crashing 69% from its top by early 2009.

Large caps went up 6 times and fell by 59%.

Returns

The returns generated by midcap over the 21 years far exceeds that of large cap. As of Aug 22 Midcap are up 26 times and large cap is up 13 times. And from 2010 midcaps went up 3 times vs large caps up 2 times.

PS: 2001 to 2008 was an exceptional time, it will never repeat gain. But what is obvious is midcaps have higher volatility. Meaning they go up higher and fall higher. And yet as you read on you will understand that the risk-reward ratio changes in your favor if you do two things
a. Manage greed and fear

b. maintain asset allocation (more about this in my next post)

The underlying not is that given the risks involved and the potential to make gains, midcaps are actually a smarter investment than large caps

2001 to 2022

Midcaps from 2001 till 2022 vs large caps

2010 to 2022

Should you invest only in midcaps, then?

Risk

Drawdown are % price fall from all-time highs.

Mid-cap are a more volatile asset than large caps. The below tables will help us frame a more realistic expectation from this asset.

The last 10 years have been low growth and high volatile phase for the markets. Midcaps have had higher volatility compared to large caps. And that meant that returns over one or three year were not high enough for the risk taken. Midcaps even in this lower growth environment performed better compared to large caps. Over five years timeframe, midcaps delivered better returns with similar downside risk as large caps

So, if you are someone who can stomach volatility over 3 to 5 years+, then midcaps should be your choice. This is because risk of loss is lower, while rewards are higher.

If you someone who want to reduce volatility and have a long time frame then my next blog on Rule Based Investing or R.B.I for short😇 can be useful.
I will also try to cover some part of market cap arbitrage opportunities that could help you.