The past two years have been highly challenging for mid-caps on the whole. Even seasoned investors could not anticipate such volatility. Nobody likes to see erosion in the value of their portfolio. However, this phenomenon is considered to be normal since mid-caps are considered as highly volatile wealth creators. Investors must remember that volatility is a part and parcel of market movements.
Investors have a tendency to follow historical returns. As soon as returns turn negative, investors shy away from investing. They not only stop their SIP but also begin to press for redemptions. Such an approach can mean many missed opportunities. Investors must remember that by purely following index levels they lose golden opportunity to invest in quality stocks.
The mid-caps, as a category, have become attractive after steep correction. The bear markets provide an excellent opportunity to invest in mid-caps. The present crisis has made investors nervous. There is a general consensus about more volatility in the markets, but every investor must remember that louder the noise, the better the opportunities. The loudest noise is generated during the market bottom. The government is working proactively to mitigate the economic risks and sooner or later its efforts would pay-off. This will fuel the earnings and mid-caps on the whole.
Investors should look at the broader picture while investing. After correction, a lot of mid-caps are attractive from the investment point of view. Many mid-cap companies have low-debt and good dividend yield. This makes them an ideal candidate for investing in a long term perspective.
The mid-caps index reached its peak of 30.19x in August 2018 and hit the trough of 18.86 by the March 2020. Since then it has recovered to 24.19x. This has widened the discount between mid-caps and large-caps. Statistically, mid-caps are poised for mean reversion. If one can invest for the long term, he is sure to reap benefits as soon as the market cycle turns up.
Investing is all about life goals. If your goal is 5 years away, you should not worry about the ups and downs of the market. However, if you have a short term goal, you should stay away from mid-caps as they tend to be highly volatile. In the short term, either you may experience very high returns or drastically lower returns. The volatility can be unnerving, and not everyone can digest it.
Ironically, many investors overlook mid-caps, thus making them highly under-owned asset class. If you are a long term investor, you can invest 20% of your portfolio in mid-caps. This will help you achieve diversification of your portfolio. Remember, the mid-cap funds tend to reward those who have patience.
As mentioned before, mid-caps are highly volatile. If you try to test waters yourself, you may end up holding underperformers and become frustrated. It is best to consult your financial advisor who is very thoughtful and possess an understanding of markets. If you are afraid to invest in lump sum, you can invest through SIP. Not only you will be able to stomach the decline, but also get the advantage of cost averaging which will ensure higher returns in the long term.
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