How should one invest in mid cap shares?

The mutual fund industry in India has grown tremendously in the past few years. In 10 years it has grown from 7 lakh crore to 40 lakh crore. Total AUM is 41 lakh crore. While there are 14 crore folios. Although Edelweiss estimated in research there are only 3.5 crore investors.

This indicates that mutual fund industry represents a large number of investors at the same time they can make big plays that will impact the stock price more significantly. Two trends are coming from MF industry which will impact the stock market and retail investors. First is the top 10 companies and 2nd one is related to corporate governance.

With this background let’s look at the top 10 companies that have the biggest mutual fund holdings. This reflects that mutual funds are generally betting on mid-cap companies that have a market cap between Rs 5,000 crore to Rs 20,000 crore. They have picked up companies which they feel long-term growth potential.

Mutual funds are getting more involved in the corporate governance decisions of companies. So in companies that have higher MF holdings promoted will be kept in check to make more investor-friendly decisions. This is a very critical step for Indian businesses.

Right now promoters in India are seen as demigods or more like Czars that can do whatever they want in their companies as there is not much check and balance. Yes, there is a board but are boards really that active and powerful to care about normal investors? These board members are generally friends of management so they hardly speak against management decisions.

Hence it’s the job of activist investors to keep management in check and ensure they take decisions that are investor friendly. So if mutual funds are getting more involved in corporate decisions then management will be under pressure to stay on track and take decisions that are more investor friendly. So if the retail investor is entering some stock and that company has higher mutual fund holding then they can feel more confident about a company taking better decisions.