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Sunday, August 24, 2014

How to select good mid-cap and small-cap stocks for your portfolio without trying too hard

We are living in an age of instant gratification. No one has the time or patience to brew a nice cup of filter coffee. Too much hassle. Just go to the nearest coffee bar and pay through your nose; or, boil a cup of water and stir some instant coffee in it.

Want to buy a car? No need to save money for 10-15 years. Just go to a car dealer, show your income statement or tax return, pay a token lump sum amount and drive out in a shining new 4-wheeler, and then pay nearly double the cost of the car through monthly EMIs.

Want to enter the stock market? Just open a demat account and a trading account with a large broker or bank, and start buying the next Infosys and the next L&T being discussed in stock forums or business TV channels. Instant gratification doesn’t quite work in this case, does it? Where are the huge returns that every one seems to talk about?

Instant gratification usually ends up costing you much more – in terms of money, health, stress. If you are really interested in fabulous returns from the stock market, there is only one way out. Learning to do things the proper way – which means spending time and being disciplined and patient. Easier said than done for most people, who work hard, live fast and prefer to go for vacations at Langkawi or Nice.

If you neither have the time, nor the inclination to learn how to select good stocks – a process that requires learning how to read an Annual Report, calculating financial ratios, studying economic conditions in the country and overseas, supply and demand in various industrial and service sectors, and observing different patterns on price charts – here is a simpler process.

Select the top-ranked (by 5 yr returns) mid-cap and small-cap funds listed at and check their top 10 equity holdings. The hard work has already been done for you. Just go through the table below.

Religare Invesco Mid N Small Cap BNP Paribas Midcap Franklin India Smaller Companies ICICI Prudential Value Discovery
Brittania VA Tech Wabag Finolex Cables ICICI Bank
DB Corp Idea Cellular Yes Bank Reliance Ind
Gateway Distripark Axis Bank Repco Home Fin Sadbhav Engg
ING Vysya Bank HPCL JK Lakshmi Cement PI Industries
Federal Bank Yes Bank Mindtree Exide
Redington IndusInd Bank Cyient Mindtree
Guj Pipavav Port Oil India Amara Raja Amara Raja
City Union Bank Alembic Pharma SKF India Guj Pipavav Port
AIA Engineering Orient Cement Axis Bank Balkrishna Ind
Greaves Cotton Motherson Sumi Aegis Logistics Max India

Leaving aside a few large-caps like ICICI Bank and Reliance Ind, the rest are a representative sample of good mid-cap and small-cap stocks. So, here are two things you can do:

1) Select a few stocks from the four funds and add them to your portfolio. Choose the ones whose businesses you understand to a certain extent. Alternatively, choose stocks that are appearing in more than one fund – like Amara Raja, Mindtree, Axis Bank and Yes Bank.

2) If you are really pressed for time (or lazy), start a SIP in any one of the four funds. Each of these funds has returned about 25% for the past 5 years. That indicates a consistency of performance over the long-term.

Related Posts

Can investments in only 3 funds provide adequate portfolio diversification?
How to pick Stocks for Investment - Part I
How to pick Stocks for Investment - Part II
How to pick Stocks for Investment - Part III

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