Invest in midcap funds

K. ARAVIND

Many experts share the view that this is a good time to buy shares of small and medium enterprises. A section of companies with high weightage in the stock indices Nifty and Sensex have become very expensive. At the same time, small- and medium-sized companies still have a large number of low-cost stocks.

Large-cap stocks were the main gainers when the indices rose. SMEs did not play a significant role in this move. At the same time, there is a strong expectation that the next five years will pave the way for more investment in the best SMEs.

It is likely that investment firms will change the way they currently invest significantly only in large companies and focus on better midcap stocks. Many small- and medium-sized stocks are now at a very low level in terms of their all-time value.

Companies in the 101st to 250th position by market value are classified as ‘midcap’ and those in the 251st to 500th position in the ‘smallcap’ category.

Small- and medium-sized stocks are likely to perform well at a time when the economy is booming. Shares with relatively low market value tend to jump in such situations. At the same time, these declines are likely to intensify as the business cycle moves towards recession.

Neither the Sensex nor the Nifty are able to include many high-growth companies in their basket due to technical limitations. At the same time, experts point out that it is normal for small stocks to trade at a higher value than large stocks when there is a boom in the economy. This is because the stock market value dictates the future growth potential of a company. When the economy is on the path to good growth, it will be more beneficial for medium and small companies.

Stock indices Nifty and Sensex are likely to move further by 5 per cent to 10 per cent. At the same time, high weightage stocks included in the index are expensive and no major improvement can be expected in the index. At the same time, as the index stabilises, demand for shares of small and medium-sized companies is likely to increase. All investors need to do is try to seize the opportunity well in advance.

At the same time, do not expect all stocks in this category to perform well. Shares that are low cost or reasonably priced should only be purchased if their growth potential is clear.

It is better to rely on mutual funds when you are confused about stock selection. This is especially true for small- and medium-sized companies. It is difficult for ordinary investors to choose and invest in the best midcap and smallcap funds.

SEBI classifies funds that invest more than 65 per cent of their assets in midcap stocks as midcap funds. Similarly, small cap funds are funds that invest more than 65 per cent of their assets in small cap stocks.