Stocks outside Sensex and Nifty are likely to drive the market in the coming days

The recent upturn was purely driven by foreign institutional investors (FIIs). They have predominantly invested in 12-15 large-cap stocks in select sectors such as FMCG, technology, and pharma, leading to heavy polarization in the market.This has created large valuation gaps between various segments of the market, making the situation ripe for attractive Mid cap and small cap investing.Investors, who subscribe to the logic of looking beyond Nifty and Sensex, have multiple options before them. Invest in mid- and small-size companies for diversification, but only after understanding your risk-taking capacity.

Price to earning multiple of CNX Nifty has corrected to 18.7 from 27.64 six years back, a correction of 32%. CNX Midcap index PE has corrected to 14.8 from 25.64, a correction of 42%, in the same period. Obviously, that makes mid cap space attractive. CNX Midcap is also more diversified. Its top five constituents account for only 16.32% of the index. Moreover, contrary to popular belief that the mid caps are more volatile than large cap stocks, CNX Midcap index has registered lower volatility compared to CNX Nifty. As per NSE data, as on September 30, 2013, CNX Nifty has 5-year standard deviation of 1.62 as against 1.43 for CNX Midcap. Mid cap space also offers more sectoral diversification.

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