India Midcaps: An ideal wealth generation opportunity for NRIs

When Raj Subramaniam was recently appointed CEO at Fedex, he joined an illustrious list of NRIs/OCIs who have excelled and received significant recognition in their host countries due to their substantial contribution in diverse fields which include finance, consumer businesses, health care and technology.

Many of the NRIs left shores of India in the last 5 decades seeking higher education, growth & career opportunities. However, for most of them, their emotional connect with their home country continues to be strong. Hence, typically seek to maintain a base in India & not surprisingly NRIs have contributed to more than 15% of annual real estate sales in the metro cities (in absolute terms, it is about US$8-10bn).

In my conversation with Non-Resident customers, they are keen to diversify their investments in India. Still, they have held back owing to sometimes lack of clarity and, at other times, lack of professional advice in managing their India dedicated investments. Fixed deposits are another easy option as they seemingly offer higher interest rates than the host countries, but exchange rate volatility leaves room for very little arbitrage. In my opinion, just like any other investor category, an actively managed equity portfolio must be a part of any NRIs investment portfolio in India.


The most attractive aspect of investing in India is the outsized alpha opportunity that the market presents compared to any other equity market globally, given that the Indian market is still relatively more under-researched and under-brokered. While such alpha opportunities are present across the market cap spectrum, the SMID (small & mid) segment of the Indian equity market is particularly fertile for idea generation and bottom-up stock-picking, given that it is relatively more inefficient.

While the above is true for all other markets, in India’s case, it gets amplified given that there are diverse and expanding numbers of listed businesses with heterogeneous business models.

Moreover, every sector has a distinct mid and small-cap segment. For example, in the industrials sector, there are companies within various sub-segments such as consumables, light manufacturing, bearings and coatings, and capital goods. Within the consumer sector, too, there are ample opportunities in personal products, food, and beverages, paints, retail, and jewellery.

The market leaders in many sub-categories are mid-caps with a long runway for growth. Take QSRs (or Quick Service Restaurants), for example - the biggest listed company in this category is a mid-cap; this segment is still under-penetrated, is in the early stages of adoption, and presents a sizeable opportunity as it is well-aligned to India’s fundamental drivers – strong domestic growth and favourable demographics.

The same would be true for Diagnostic companies in healthcare which saw the first listing a few years back. It’s only a matter of time when India, presently a 3 trillion $ economy grows to 5 trillion $ and some of these sectors which are in infancy see outsized growth.

An NRI investor can connect to some of these trends more readily as they would have already seen them play out elsewhere.

India also has a vibrant start-up ecosystem and is home to more than 100 unicorns (the third highest in the world). Many of these unicorns would also be up for listing over the next few years, and most of them are within the midcap segment.

While it is true that midcaps present a higher alpha generation potential, it is also true that stocks that are a play on the same opportunity set can perform very differently. Over a 10 or 15-year period at the headline index level, midcaps have generated anywhere between 12-17% annualised returns, although, at the granular level, some stock prices have multiplied manifold.

The above statement also means that investments in some stocks have been wiped out completely. Research shows that there is a greater probability that a mid-cap slip to a small-cap than transforming into a large cap. The most critical aspect here is to determine the management's track record, corporate governance and execution capabilities.

The midcap space offers many alpha generation opportunities, but investments in this segment would require active monitoring, which many NRI investors may find challenging to do on an ongoing basis. This is where they can rely on the advice of a professional manager to invest through actively managed funds. After all, in-house research capabilities matter a lot – not only in spotting the winners but also in avoiding corporate governance disasters.