Risk vs. Reward: Evaluating Risk Appetite in Midcap Investments

Risk appetite means the amount of risk you are willing to take for higher investment returns as an investor. Risk tolerance relies on investment goals, time horizon, financial situation, and personal comfort. However, another parameter you should not overlook is uncertainty in the market.

Typically, high-risk investors prefer to invest in mid-cap equities. But what are these stocks, and how can you enhance the returns while minimizing risk? Let us understand.

What are Midcap Stocks?

Mid-cap stocks have moderate market capitalisation. They have a capitalisation between Rs. 5,000 crores and Rs. 20,000 crores. These stocks have a large trading volume and are liquid compared to small-cap stocks.

The most intriguing aspect of these stocks is their potential to become large caps shortly. That is why holding mid-cap equities longer is often recommended to weather short-term volatility.

Tips to Improve Mid-cap Investments Returns

Follow the below points to balance the risk and reward in midcap investments.

1. Diversification

Spread your investments across various mid-cap stocks to mitigate risk. It will help cushion the impact of any single investment’s poor performance. Suppose you have Rs 10,000 ($120) to invest. You invested Rs 5,000 ($60) in healthcare and Rs 5,000 ($60) in IT stocks.

On budget day, the news benefited the healthcare industry, but the IT sector was upset owing to tighter regulations. In this situation, the hike in your healthcare investment returns will offset the loss faced in the IT stocks.

2. Quality Over Quantity

Diversification does not imply spending your wealth mindlessly on any mid-cap stock that comes your way. You should extensively study the company’s balance sheet, managerial expertise, and any recent orders the company has bagged.

You must also look into whether the government has made any new announcements for the sector you want to invest in. Remember that companies with strong fundamentals are less susceptible to economic downturns and can provide higher risk-adjusted returns.

3. Dividend Policy

Monitor changes in dividend policies, as they can be indicators of a company’s financial health and prospects. Let’s take a hypothetical example of a company, TechGrow, which is listed on the Bombay Stock Exchange (BSE).

Now, suppose TechGrow announces an increase in its dividend payout ratio. This could indicate that the company is generating more profit than it needs for reinvestment, which might lead to a rise in this BSE midcap share price.

4. Market Timing

Avoid trying to time the market. Instead, concentrate on the long-term capability of your investments.

Let’s consider an example. Imagine you have invested in BSE midcap companies that are performing well. Seeing a short-term dip in the market, you decide to sell your shares, hoping to buy them back at a lower price.

However, the market quickly rebounds, and the stock price rises. Now, to regain your position, you have to buy back at a higher price, incurring losses instead of the gains you anticipated.

Conclusion

Mid-cap investments have higher profit potential than large-cap stocks. However, they are not risk-free. Therefore, it is recommended that you implement the above pointers in your approach to maximum results. To start investing, consider Dhan, India’s one of the leading investment and trading platforms.