Measure The Potential Of Mid Caps: Here's What You Need To Look For

There are some schemes in the mid-cap category that have been outperforming the benchmark for over 10 years. The tricky part is to identify those that have the potential to deliver remarkable returns from the lot.

This category includes the next 150 companies after the first Nifty 500. So, the category is not necessarily small companies but companies with Rs 58,000 crore average equity, according to Radhika Gupta, chief executive officer of Edelweiss Mutual Fund.

"This is a sweet spot category for investors, as these market leaders have consistently delivered returns that are hard to beat," she said.

This category is all about picking the right stocks, according to Gupta, who adds that spending time formulating an investment strategy is also crucial.

Factors like analysis of past performance, accounting for the pricing and the robustness of the business model are measures that can be used.

The second measure is the construction of what comprises the schemes, like cash calls and exposure, among others.

Liquidity is a condition that will help one's account with downside protection.

"When things go wrong, you want some protection, as mistakes in mid-caps can be very costly," she said.

The rolling returns of the schemes in the last five years are a meter for consistency in performance and considering a longer period would help filter the best of the lot.

Finally, the risk that the investor is taking would be understood and measured with tools like the Sharpe ratio. The performance of the scheme while the broader markets were not doing well will help understand the downside protection of the schemes.

There are a few things to look at before picking a scheme, according to Anant Ladha, founder of InvestAajForKal.

The first meter is consistency in performance and this is not limited to outperformance over a certain period of time. One should pick a scheme that is able to stay among the top-performing quartile for the longest possible time.

Other aspects to consider include the rolling returns and the fund manager's performance. These aspects, along with the downside protection in the past, ensure that the recency bias is limited and that the performance of the scheme itself justifies its capability to bring better returns.

Ladha's pick for an investor looking for less volatility and decent downside risk coverage would be the Kotak Emerging Equity Fund. For aggressive investors, he recommends schemes like the Edelweiss Midcap Fund and the Whiteoak Midcap Fund.