Investing in the stock market can be confusing because of the number of choices available. Mid-cap stocks are such an option. These stocks are ideally positioned between small and large-cap stocks, with exciting growth potential at a reasonable risk.
In this article, we’ll look at five compelling reasons why mid-cap stocks are favored by investors and how they can help you financially.
1. Strong Growth Potential
Mid cap stocks are typically defined as those having a market capitalization of between 5,000 and 20,000 crores. Often in the growth phase of their business cycles, mid-cap companies offer a balance between the rapid growth of small-cap stocks and the steady growth of large-cap stocks.
According to recent analyses, the Nifty Midcap 100 index has regularly outperformed large-cap and small-cap indices over the long term, demonstrating the growth potential of Mid-Cap stocks.
It had a value of 59,248 as of Oct 2024, which is higher than its 52-week low of 37,655.85. The data suggests that mid-cap stocks have grown by about 60% in the last year, demonstrating their robust recovery and upward trend.
2. Better Risk-Reward Balance
They usually experience less volatility than small-cap stocks, which are generally prone to large price swings. Mid-cap stocks usually provide more significant returns than large-cap stocks, which might be a more stable option but generate much lower returns.
In contrast to large-cap stocks, which have only returned approximately 18% CAGR over the past five years, mid-cap stocks have generated impressive returns of roughly 30% CAGR.
Mid-cap stocks have proven beneficial to investors because of the positive risk-reward ratio— which offers both lower risk and growth potential.
3. Increased Institutional Investors
As mid-cap companies grow, institutional investors, including mutual funds and foreign institutional investors (FIIs), show increasing interest in them. The upward pressure on prices when institutional investors start buying mid-cap stocks results in significant gains for early investors.
In 2023, mid-cap mutual funds attracted ₹22,913 crores in inflows, indicating that institutional investors had great faith in them. This influx enhances market stability and liquidity by making it simpler for retail investors to buy and sell shares without suffering large price swings.
Mid-cap stocks have proven beneficial to individual investors because of their credibility due to institutional backing.
4. Possibility for Expansion
The potential for mid-cap stocks to become large-cap stocks has benefited investors. Over time, several prosperous mid-cap companies experience significant price appreciation as they increase and broaden their market share.
Investors can benefit from higher returns when these promising companies grow and enter the large-cap category by making early investments in them.
A few years ago, companies such as Avenue Supermarts (D-Mart) and Eicher Motors were considered mid-caps. These businesses’ market capitalization increased as they expanded, giving early investors huge returns.
Mid-cap stocks can experience exponential growth during this shift from small- to large-cap stocks, making them an excellent investment.
5. Lower Volatility Compared to Small Cap Stocks
Mid-cap stocks are typically less volatile than small-cap stocks despite carrying a higher risk than large-cap stocks. They are, therefore, appropriate for investors seeking growth exposure without the sharp fluctuations that frequently accompany small-cap stocks.
For example, mid-cap stocks offer better risk-adjusted returns compared to small-cap stocks as they are comparatively more stable. You can check various mid-cap stocks on your trading app to compare and invest.
Conclusion
The distinct position of mid-cap stocks in the market can be advantageous to investors. As they develop into large-cap companies, these stocks present growth potential with an attractive risk-reward ratio. Mid-cap stocks remain a suitable choice for investors looking to strike a balance between growth and risk while investing.
