2023 can be the best year for small and mid-cap stocks. Find out why

Why small and mid-cap stocks might perform well in 2023

Mid and Small Cap

Stocks on the stock market are categorized into three main categories – large-cap, mid-cap, and small-cap stocks. The leading companies already established and have the highest market capitalization have large-cap stocks, followed by midcap and small-cap stocks.

The returns from these three market capitalizations vary. Large-cap stocks are stabler and offer stable returns, while mid and small-cap stocks have a high growth potential.

Over the last three years, the stock market has reached record-breaking highs. Let’s see how the three market caps have performed in the past –

mid-cap stocks

As you can see, the mid-cap index has performed better in the long run, even on a risk-adjusted basis.

The mid-cap story 

When it comes to mid-cap stocks, the returns are cyclical in nature. While the 3-year returns are exceptional, mid-cap stocks have already outperformed themselves. As such, in 2023, these stocks might not deliver the same magnitude of returns. Moreover, with international countries facing a recession, foreign trade will be impacted, thus stunting the growth in the current year.

However, the long-term perspective changes the game. Short-term volatility and underperformance do not hold over the long run. Moreover, with the changing landscape of the country and the increasing Capex of companies, the GDP is expected to grow in the coming years. Midcap stocks will also grow as the economy grows and deliver attractive returns for investors.

Moreover, in the post-COVID world, household spending and asset creation have improved. More investment is expected to flow into the market, and midcap stocks might rake in the moolah.

Concerning government incentives, the Production-Linked Incentive (PLI) scheme will give impetus to the manufacturing sector contributing to its growth. Growth equals better company profits, revenues, and risk tolerance among investors. All these factors are conducive to the growth of mid-cap stocks.

So, if you are looking for short-term returns, midcap stocks might not deliver. But with time, you can expect good returns on investment.

Related - Understand the risks associated with midcap stock investment

The small-cap story 

The small-cap segment is highly volatile since the companies are still in their growth and development stage. As such, their stock prices fluctuate wildly in the case of market volatility.

That being said, small-cap mutual funds have performed well in the past, delivering a considerable alpha. Thus, like mutual funds, small-cap investments might yield good returns in the case of professionally managed funds.

Moreover, since the small-cap segment underperformed in the 1-year and 5-year periods, it is poised for growth in the coming years as its performance cycle recovers, making it the right time to invest in them.

So, understand the risks and returns associated with midcap and small-cap stocks and then invest in them for portfolio diversification if they align with your investment strategy.

Related - Find out whether you should buy small-cap stocks when the market corrects

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