For those used to thumbing their nose at mid-cap stocks, events over November and December 2004 would have left a few bruises. That's when the CNX Midcap index surged 569 points (an impressive 28 per cent) from November 1 to December 31, 2004. In the process, the index, which is based on the NSE's Nifty, roared past the mainstream index (see The Mid-cap Surge). And if you thought it was just a short-term fad driven by the general bull sentiment and would probably die down soon, think again. Despite subsequent corrections since January 1, 2005 (it lost 154.95 points up to January 18), fund managers believe that the mid-cap bull isn't done yet.

Rushab Seth, Chief Investment Officer & Head-Equity Investments, Kotak Mutual Fund, explains: "We believe that mid-cap is a long-term story. Investors should stay invested in this sector for a longer period of time to take advantage of the opportunities available."

The Mid-cap Opportunity

So what's a mid-cap company, really? Going by investments made by mid-cap schemes, such companies would be small- and medium-sized ones with market capitalisation between Rs 500 crore and Rs 1,000 crore, though this could vary slightly from one fund house to another. In a classic situation, when a company reaches its mid-cap stage, it is said to have survived the highest-risk part of its lifecycle, the small-cap stage, and would be well on the high road to transform into a true-blood large corporate entity. For a specific example, you don't have to look beyond one of the torchbearers of India's it revolution: Infosys. Points out Seth: "After all, Infosys was a mid-cap company 10 years ago."

And though it would be tough for any mid-cap company to morph into an Infosys today, there are opportunities for good growth. For one thing, the fundamentals of mid-caps have changed for the better in line with economic growth. Says Ganesh Shanbhag, Managing Director, SMS Financial Consultants: "Economic changes like liberalisation, competition and easy access to cheap capital favour mid-caps." This has created opportunities for investors in such companies at attractive valuations. The bigger factor, however, is that mid-cap companies are generally under-researched, giving investment breaks not yet spotted by the market, and hence available at reasonable valuations. Then, there is the factor of the principal architect of the recent bull run: the foreign institutional investor (FII). With FIIs pumping in dollars into the top 50 stocks by market cap like there's no tomorrow, many have reached the threshold of permitted investment in these blue-chips (despite the recent selling spree). So where do they look now? No prizes for guessing: mid-cap companies.

Sensing a potential goldmine, mutual fund houses have jumped into the fray, with more than half-a-dozen schemes being launched over the last six months to cater to this segment. Since investor interest in mid-cap schemes is at an unprecedented high, all frontline fund houses have launched mid-cap products, some despite already having similar schemes in their portfolio. The latest fund houses to join the mid-cap bandwagon are Kotak Mutual, Franklin Templeton, Cholamandalam and Sundaram Mutual, which launched multi-cap funds that would invest in a combination of large-cap and mid-cap companies. These funds are very flexible in their investment rationale and hence are similar to large diversified funds. Explains Shanbhag: "A mid-cap portfolio of a large fund house would see most companies within graduating from mid-cap to large-cap. Now the risk call is just the time of migration. The growth potential as such is phenomenal."

With fund managers licking their chops, there is an inherent danger of them being taken in by the positives of companies, and glossing over their weaknesses. This is especially likely in the case of mid-sized family-run businesses, where chances of manipulation are high due to concentration of management power. Fund houses, though, are clear about the soundness of their investments. "For one, we are not talking about penny stocks where size and liquidity are concerns. Our mandate is sufficiently liquid stocks, with at least Rs 500 crore-plus market cap," asserts Seth.

Your Strategy

So, how can you ensure golden returns for your mid-cap investments? Options are available in existing schemes, which have been doing well (see Riding The Boom), as well as new launches. While we advocate NAV-based investing (see Fresh Fund Fiddling, BT, November 7, 2004), the investor psyche is heavily tilted in favour of IPOs, since NAV-based investing is not one that has caught on in India yet. And if you are indeed considering the IPO route, check out the fundamentals of the fund house, past performance, size (assets under management) and the investing style of the fund manager before investing.

What about asset allocation? Says Hemant Rustagi, CEO, Wiseinvest Advisors: "For investors with equity exposure in the portfolio of about 60 per cent, 30-40 per cent could be invested in mid-cap funds as that's where the future growth will come from." Our take: if you already have a mutual fund portfolio, mid-cap funds offer a good avenue for diversification. But if your exposure to funds is negligible, start with large diversified equity funds, and gradually add on the mid-caps. But always go for funds that invest in fundamentally strong mid-sized companies that have the potential to graduate to large-caps, across sectors. That way, you minimise your risks, and chances of getting bruised.

Go For Gold
Yes, now is the right time to invest in your favourite crisis-management tool.

By Shilpa Nayak

What's the most liquid of all investments? The answer, gold, is a no-brainer. Investing in gold is not much different from stocks. Basic approach: buy when the prices are low, and sell when prices peak. And with domestic gold prices at a low Rs 6,068 per 10 gm on January 18, 2005 (down by more than Rs 500 per 10 gm from its festival peak of Rs 6,660 and Rs 237 from the December 2004 close of Rs 6,305), now is the right time for you to move in.

Why? "We expect a steady and healthy growth in demand," says Madhumita Kulkarni, Manager (Western Region), World Gold Council (WGC). And the demand isn't just in India, but "in other Asian countries and emerging worlds as well", according to Rajni Panicker, Head of Research, Refco Commodities. This global demand, and the fact that supply isn't keeping pace due to dwindling mine outputs, means that gold prices are likely to appreciate over the long run. Besides, the price of gold in India is directly linked to international prices (read: us prices), since India relies on imports for most of its gold requirements. A rising dollar makes American securities more attractive than precious metals such as gold, which is why the recent uptrend in the south-moving dollar saw hedge funds and bullion speculators in the US liquidating their holdings, leading to a fall in gold prices. And with the dollar likely to hold its own over the short term, gold prices are due for further correction, increasing its attraction for Indian investors.

There are other reasons for investing in gold. For one, it's an effective hedge against inflation. According to WGC estimates, the price of gold has kept pace with inflation for at least 200 years! Then, it's an effective diversifier for your portfolio. The performances of other investment classes don't really impact the movement of gold, so even a small exposure (through jewellery, bars, coins or gold futures) can check the overall volatility of your portfolio. Says Anjani Sinha, CEO, Multi-Commodity Exchange of India: "Over a longer term, gold is a risk-free investment; one could easily park about 20 per cent of the portfolio in gold." As family wisdom goes, there's no investment like gold. And no time like now.