Mid cap buying through index tracking

I have been asked by many people whether there is any rule to decide the right time to buy. Well, unfortunately all the rules that many people tout about are largely intuitive and may or may not work in a given circumstance. However, it is possible to come to some logical conclusions if you track the indices closely over a period of time. Let me try and suggest an approach in this post that has worked well for me in the past.

We will continue with the Nifty Midcap 100 index today and use the following data to arrive at some possible conclusions as to whether it is a good buy at this stage. The data points are:-

  • Current level is 12302, 52 week low is 11857 and 52 week high is 14237.
  • YTD returns are -2.23%, 1 year is -6.3%, 6 months is -8.1%, 3 months is -7.9%.
  • 200 DMA is 13100, 150 DMA is 13176, 50 DMA is 13011 and 30 DMA is 12970.

What are the conclusions we can possibly draw from these? Here are some:-

  1. The trend of Nifty Midcap 100 has been fairly flat with the downward cuts have been fairly recent. The sharpness of the cuts have ensured that the current level is well below 30 DMA.
  2. Returns have been negative for all periods over one year, indicating that the stocks making up the Nifty Midcap 100 have, by and large, had a downward trend. Moreover 1 month return is about -7.7%, showing that the present cuts are the maximum.
  3. Till Nifty Midcap 100 crosses the 30 and 50 DMA we will not be able to say that it has really started consolidating on the way up. In fact there is more likely to be further pain out here.

What should be your actions for the mid cap equity buying whether in stocks or MF. Here are a few pointers that you may be able to use:-

  • While buying mid cap MF through SIP would not have been a bad idea in this market, you need to look beyond that and purchase at the right levels.
  • In the period we are talking about Nifty Midcap 100 came down to 12500 a couple of times and found support there. Finally it breached that level in the recent down move and went all the way down to 11857. As such you can look at buying Mid cap MF in between levels of 12000 and 12600 of Nifty Midcap 100. Do not go beyond it as there will be enough chances to buy as this level in 2016.
  • Similar approach should be adopted for mid cap stocks. However, there you can take Nifty Midcap 100 as a starting point, after that you will have to do a similar analysis of price movement through DMA for the particular stock in question.

Does this guarantee that your returns will be good? Unfortunately, no but what it does guarantee is this – because you are buying in a sensible way and not doing SIP mindlessly, your portfolio will be one of the quickest ones to recover when things start getting better. What is happening in the markets is not in your control but the price at which you want to buy equity is. Do not give it up and watch things in a helpless manner – that is simply not good enough strategy for your investments.

I will shortly do a similar post for small cap space.

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4 thoughts on “Mid cap buying through index tracking

  1. Hello Sir, The P/E ratio of Nifty Mid Cap 100, inspite of the recent fall is at a very level of around 25 and is very much at a premium to Nifty 50 (PE of 20) . If we look at the historic PE ratio of Nifty MidCap index, the value is at a very high range. Would like to know your opinion on whether to totally avoid the midcaps (barring some individual quality midcaps which might have gone for huge correction) until price correction or time correction happens.

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