Synopsis
Mid-caps may come under pressure and underperform in the short term. But over the long term, they do well. There are several data points to support this contention. To understand why, look at one factor – cost of capital. Consider: Fifteen years back, a company from a large and reputed industrial house raised money by floating corporate bonds at X% interest. A mid-size company would raise money at X% plus 200 basis points – paying 2% more for capital. Today, that large company is still raising money at “X%”, but what has changed is that the mid-sized company is also raising money at X%. The reason: Capital is now more easily available. The mid-cap has improved its balance sheet, which may be smaller than the large company, but, in terms of quality, is probably as good. So it is bound to do well because the quality of the balance sheet is what determines PE multiples.
There are phases in the market when mid-cap stocks come under strong selling pressure – as seen in the past few weeks. But if you consider the past 10 years, the best returns have come from mid-cap stocks. So, if you don’t have mid-caps in your portfolio, your returns will not be too high even in the longest of bull runs. Why do mid-cap stocks do well? Reason: When an economy like India grows at a faster pace, mid-sized companies are able to
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