Is it a good time to buy mid caps?

Despite the recent correction, the CNX midcap index is trading 15% higher on a Y-O-Y basis

Gautam Chhaochharia Head of India research, UBS

Mid caps have better potential to grow in developing countries like India. On the other hand, current valuations — both absolute and relative to large caps — are not very comforting. So, I would say that the risk-reward doesn’t look attractive compared with large caps. However, retail investors are investing money in mutual funds, which are more biased towards mid caps than foreign investors. Lower interest rates, a fall in commodity prices and improving sales have helped select mid caps to record sharp earnings growth. Investors should go for a bottom-up and diversified approach towards mid caps, as the market is in a consolidation phase. Despite the recent market correction, we still prefer large caps over mid caps and we are overweight on financials, pharmaceuticals and telecom industries. While select mid caps might continue to do well even when the recovery in earnings kicks in, I would still suggest that large caps are a safer bet.

Niraj Dalal Founding partner, 3A Capital Advisors

Certain mid cap stocks have reached a valuation where irrespective of the market falling a further 5-10%, they make for a compelling buy. Within the mid cap space, there are going to be stocks where you will understand the business dynamics and you know the results will be good. With such stocks, you don’t worry about the market behaviour; you just look at the valuations. You will never get a perfect bottom or a perfect top in the market. So, if there is a stock that was trading at Rs 40 and is suddenly available at #30 with no change in the outlook, then you should put your money over there. Most of us tend to equate the movement in the Nifty and Sensex with what could happen in the mid caps. Some mid caps will gain 20-30% even if the market fluctuates. So, the right strategy would be to have a bottoms-up approach. However, one must invest with a view that the stock could correct further and markets can behave irrationally in the short term.