Ved Prakash Chaturvedi must be ruing his luck. The 39-year-old Managing Director of Mumbai-based Tata Mutual Fund, which launched a mid-cap fund on June 1, would love to, if he could, rewind to 2004, when mid-cap stocks and, by extension, mid-cap funds, outperformed all other stocks and funds by a wide margin. Consider this: In 2004, the bellwether BSE Sensex rose 26.8 per cent and the NSE Nifty grew 11.9 per cent. The corresponding figure for the cnx Midcap 200, the mid-cap index of the National Stock Exchange (NSE): 112 per cent! Mid-cap funds gave impressive average returns of 35-50 per cent, compared to 20-24 per cent for large caps in 2004. It's more of the same if you look at a three-year (2002-2004) horizon. During this period, the CNX Midcap 200 gave an annualised return of 56.89 per cent compared to 28.73 for the BSE Sensex and 25.25 per cent for the NSE Nifty.

This success has drawn several fund houses and retail investors to the mid-cap party. The Tata fund mentioned above is expected to have a corpus of Rs 500 crore, and will target 30-40 stocks from the CNX Midcap. And Templeton's Prima Fund, which had an exposure of Rs 300 crore to mid-caps in 2003, now has Rs 1,600 crore riding on them.

With so much action in this space, an obvious question springs to mind: is the mid-cap segment overvalued? Another question follows, naturally: is it likely to crash? Most mid-cap stocks have risen from less than their book values in 2002 to 12-14 times the number today. So, is it time to bail out? The answer to that is an emphatic No. Why? Because there are still hidden treasures tucked away in the universe of 5,000 mid-cap stocks floating around the bourses. Says Sandeep Neema, Fund Manager at the Mumbai-based J.M. Financial Mutual Fund: "There are always new undervalued and non-researched stocks to look out for." Agrees Anoop Bhaskar, Head of Equities, Sundaram Mutual: "One can still construct a portfolio of mid-cap stocks that will give double-digit returns over the next few years."

ANALYSTSPEAK Four leading market watchers give their take on the mid-cap story as it stands now.

SHASHI KRISHNAN CEO/ Chola Mutual Fund Quit mid-caps? No Reason: The problem of liquidity, which plagued mid-caps earlier, is now a thing of the past. Greater inflows will drive prices up SANDEEP NEEMA Fund Manager/ JM Financial Mutual Fund Quit mid-caps? No Reason: The mid-cap rally is for real because there are major structural changes in the Indian economy emanating from corporate restructuring and better market opportunities NILESH SHAH President/ Kotak Mutual Fund Quit mid-caps? No Reason: The good times are going to last for several years because there are lots of bottom-up stories still left to be discovered ANOOP BHASKAR Head of Equities/ Sundaram Mutual Fund Quit mid-caps? No Reason: Despite increased valuations, one can still construct a portfolio of mid-cap stocks that will give double-digit returns over the next few years

There are two reasons for this bullishness. One, FIIs (foreign institutional investors) have mostly exhausted the investment limits stipulated by SEBI (Securities & Exchange Board of India) for large-cap stocks and have now trained their guns on mid-caps. Two, the general improvement in the economy and the soft interest rate regime have given a boost to mid-rung companies. Says Nilesh Shah, President, Kotak Mutual Fund: "As long as the economy is on an upswing, mid-caps are unlikely to crash."

So how do you select potential winners from a pack of 5,000? "The trick," says Nikhil Vohra, Vice President at SSKI, "is to select mid-caps that have the potential to become large caps over a period of time." That's easy to say, but hard to implement, particularly for retail investors. So, to ease your burden, we profile six mid-cap stocks that have the potential to give a loud bang for your buck.

Bharat Earth Movers: This public sector manufacturer of earth-moving equipment, the second largest in Asia, has a 70 per cent market share in its industry. With products like hydraulic excavators, heavy-duty trucks, rail coaches and high-power diesel engines, and a bulging order book of Rs 2,003 crore, the company is poised to extract full value from the boom in sectors such as coal mining, steel, cement, power, irrigation, construction, road building and railways.

IVRCL Infrastructure & Projects: A leading construction company in the water-related projects space, IVRCL has a robust order book of Rs 2,540 crore (which is more than two years' sales). Besides, its investments in Oman and Sri Lanka (where it is working on turnkey water-related projects) are likely to bear fruit over the long term.

Praj Industries: India's dependence on oil imports and, consequently, the move to increase the availability of blended ethanol and petrol for use as fuel spells good news for Praj Industries, a manufacturer of distillation equipment that is used for the production of ethanol. The company is looking to spread its wings beyond India's borders, and looks a good bet for the future.

Marico Industries: It may be a second-rung FMCG major, but Marico is still a leading player in the hair oil segment (think Parachute and Care) and in branded edible oils (think Saffola and Sweekar). Leveraging these, and focussing on new businesses such as Kaya Clinic and Sundari Clinic will help propel Marico into the big league. Three Kaya Clinics have already been launched in Mumbai, Delhi and Bangalore-Marico describes them as wellness centres for skin-while Sundari Clinic deals with ayurvedic skin-care products.

Geometric Software: A company that provides product life-cycle management (PLM) solutions to global original equipment manufacturers (OEMs) in partnership with Dassault Systems, EDs, IBM and others, Geometric Software is likely to be a major beneficiary of increased spending on it. Analysts expect this aspect to turbo-charge the company's bottom line. Revenue growth for 2005-06 is projected at 45 per cent.

Automotive Axles: Part of the booming auto-components manufacturing sector, Automotive Axles, analysts expect, will see its exports zoom from Rs 11.5 crore in 2003-04 to Rs 100 crore in 2005-06. The company's foray into the supply of gear parts and other high-value components will boost both its top- and bottom lines.

As with all success stories, there are pitfalls to watch out for. "During a slowdown, mid-caps are likely to impacted much more than large caps," says Bhaskar of Sundaram Mutual. Also, any firming up of interest rates or squeeze in liquidity can leave mid-caps gasping for funds.

Picking the right mid-cap stocks to put your money in is, therefore, not as easy as picking an Infosys or an HLL. Besides the six companies profiled in this article, there are other potential winners as well. To spot them, you need to screen companies using standard stock selection parameters such as nature of business, financial performance over the years, position vis-à-vis the market leaders, growth prospects, etc. It's a decision that requires research and involves risks. An easy way out is to go the mutual fund way. With the records of several fund houses readily available, that shouldn't be a difficult choice to make.