midcap stocks: Fitter & Stronger: Midcaps outperform smallcaps in long term

Mumbai: Mutual funds that bet on midcap stocks have worked well for investors who have used systematic investment plans (SIPs) over longer periods, outperforming their smallcap counterparts.

A study by Equirus Credence Family Office shows that the Nifty Midcap 150 Total Returns Index (TRI) delivered an average return of 17.3%, vs 15.1% for Nifty Smallcap 250 TRI, based on 10-year rolling returns. Over 15 years, the midcap index returned 16.9% versus 14.1% for the smallcap index.

“Midcap stocks have outperformed smallcaps over long term offering better risk-adjusted returns, stronger business fundamentals, and higher survivability,” says Chanchal Agarwal, CIO, Equirus Credence Family Office.

Mutual funds categorise companies ranked 101-250 by market capitalisation as midcaps, while those ranked 251 and below fall under the category of smallcaps.

This makes the midcap universe a narrower space compared to small caps, which comprise a much larger and more fragmented set of companies. The recent flood of MF inflows, through SIPs, has had a more concentrated and pronounced impact on midcap stocks, driving valuations and supporting performance.

Even over shorter durations of three and five years, the midcap index returned 13.9% and 17.4%, respectively, as against 11.9% and 15.11% for small caps.”The best smallcap companies go on to become midcap companies and hence it is logical that over the longer term they offer better returns,” says Trideep Bhattacharya, CIO, Edelweiss Mutual Fund.Midcaps also tend to experience lower drawdowns compared to smallcap funds. The minimum return over a five- and ten-year period for a rolling monthly SIP in Nifty Midcap 150 TRI was -8.2% and 6%, respectively. In comparison, the Nifty Smallcap 250 TRI posted minimum returns of -21.2% and 0.2%. The outperformances have resulted in midcaps trading at a premium to blue-chips. The Nifty Midcap 150 is at a PE ratio of 35.21 times as against 22.29 of Nifty. The Nifty Smallcap 250’s PE ratio is 33.82 times.

Notwithstanding rich valuations, Equirus Credence expects midcaps to continue doing well. “Midcap companies are in a strong position,” said Agarwal. “They are no longer small or unproven; many have solid balance sheets, professional management, and institutional interest.”