After suffering through around two years of underperformance, now it?s time to relook at mid and smallcap stocks which may act as a wealth generator in future. The divergence between the two groups is ?significant? compared with longer-term historical correlations, .The MSCI India Mid-Cap Index has lost around 17 per cent in the past two years, while the benchmark S&P BSE Sensex Index has gained more than 20 per cent. In two years, mid-cap sentiment seems to have gone from extreme optimism to huge pessimism.
For the coming years may be one or two, we ?expect the trend to reverse as there are many fundamentally sound mid and smallcap stocks available at a good bargain that provides a margin of safety and therefore appears attractive at current price levels.
With better risk-reward post under performance, one can selectively look to add sound stocks in this space. One of the reasons to buy mid and small caps is the high return potential, if investors can pick a winner. Of course, this is easier said than done. To pick a sound stock investors can look into the business which has good corporate governance, lower debt burden, consistent financial performance and available at a steep discount.
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