Markets tend to follow the growth of earnings. From COVID-19 lows, FY21 was the year for large caps. However, FY22 saw strong earnings per share (EPS) growth from the midcap space. In FY23, earnings spread over the largecap and midcap have been maintained.

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Lately, the Nifty Midcap 100 index has performed decently as well. The category witnessed a rise of 6.5 percent in May amid improvement in returns of midcap stocks. In FY23, the category rose by 1.15 percent. Categories like midcap IT, new-age tech, hospitals, midcap banks and luxury consumption categories, including hotels, have done very well.

Here's a look at some of the best performing midcap funds:

(Source: Moneycontrol)

The trigger

Midcaps are primarily manufacturing entities and derive a minor part of their value from brands and distribution.

Experts believe that the valuation gap between the midcap and largecap stocks is very high, which makes it easier for midcap stocks to outperform their peers. Additionally, there are fewer institutional investors in the midcap category. This means they have less competition when it comes to buying shares at a discount.

Is it worth the risk?

With the growth in the country, today's midcaps are the same size as largecaps 10 years back. Hence, the risks associated would be similar to what largecaps delivered 10 years back, said Niket Shah, Fund Manager at Motilal Oswal Asset Management Company (MOAMC).

In addition, he believes that newer high-growth spaces are much better represented in the midcap space. Thus, growth-focused investors are more focused on the midcap space.

"On top of these, the high-quality midcap space promises longer growth and over time better returns. Managed well, with a substantial risk control overlay, this space should offer a good combination of risk and return and form a significant part of a client's portfolio. In addition, the younger generation could have a more significant part of their investments into this space versus elder investors and bring their investments in a SIP manner to benefit from the marketplace's volatility," Shah told CNBC-TV18.com.

The outlook

Shah believes that margin increase would drive earnings in FY24. Hence the spread of earnings growth in midcap should remain strong.

"Government reforms such as make in India, defence indigenisation, import duty protection, etc., aid the earnings tailwinds for the midcap space, as do global tailwinds such as China +1, helping the EMS space, garments and chemicals spaces. In IT, the midcap space, where companies benefit from strongly performing verticals like auto, tech, travel and leisure, or smaller companies that have scaled up to qualify for more significant deals are winners," he added.

The last quarter sharply differentiated between the large and midcaps in the IT services and could continue. Similarly, Shah thinks that new-age tech companies are now on the path to profitability. In healthcare, the hospitals are all in the midcap space and have strong growth tailwinds behind them.

"With so many factors providing tailwinds, the midcap space is expected to continue to perform," he told CNBC-TV18.com.

First Published:Jun 5, 2023 6:43 PM IST