Why Invest In Mid Cap Equity Funds?

Among various categories from equity mutual funds, mid cap has its own charm. This category is able to deliver very high returns when markets are doing well. These fascinating returns are what make investors go for them. But on the other side, they also get the most of the beating when markets are otherwise in a bad phase. The variation between fall and rise can be huge in mid-cap equity funds which makes an investor think whether to invest or stay away from them. Many gets attracted to fascinating returns and overexpose their investments  to this category. 

Here we understand the category and why mid-cap equity funds, even though its high in risk-return characteristics, can enhance your portfolio returns –

Performance

The Index

Before we understand the inherent risk attached to mid-caps let’s see how they have delivered in the past. When you look at the market history then we see the outperformance of mid-cap index during the bigger market crashes. Take for instance 2008 and 2010.The mid-cap index has outperformed the Sensex and Nifty by almost 17-25%. Similarly, if you look at the performance of mid cap and large cap index in last three to five years then mid-caps have delivered almost 80-100% in comparison to large cap index 25-40% return. While analyzing the calendar year performance, in 2015 large cap was down by almost 2% while mid and small cap index has delivered 6-10% return. Going back to 2011, the year saw large cap falling by 23% whereas mid and small cap fell by almost 27%.

Source: Value Express FE

So the historical picture shows that mid and small cap tend to deliver superior returns but also tend to fall higher during market downfall.

Mutual Funds Schemes

Within the mid and small cap category, there are funds which have done exceedingly well in last five years. Their consistent performances in both phases of the market have made a point to have them in your investment portfolio. Below is a tabular chart of performance of some of the  mid & small cap equity mutual funds scheme:

Scheme Name	Category	Returns (% Annualized)
		1 Yr	2 Yr	3 Yr	5 yr
Franklin India Smaller Companies Funds- G	Small Cap	-2.4	41.5	30.0	22.4
Mirae Asset emerging Bluechip fund-G	Mid Cap	-0.3	41.6	28.7	23.7
Reliance Small Cap Fund-G	Small Cap	-0.6	46.7	34.8	21.6
Canara Robecco Emerging Equities- G	Mid Cap	-2.1	45.9	28.6	21.2
DSPBR Small Cap Fund-G	Small Cap	-5.4	34.0	20.9	15.3
IDFC Premier Equity-G	Mid Cap	-6.2	27.7	19.3	16.7
HDFC Mid Cap Opportunities-G	Mid Cap	6.2	33.7	24.0	19.2
UTI Mid Cap Fund –G	Mid CaP	-5.5	39.0	28.7	20.0
Category Returns		-4.2	24.1	13.6	9.7

Source: Moneycontrol

Most of the  funds listed above have beaten their category average returns. When you compare them to their benchmark indices then also the outperformance margin is  higher.

The Risk

Mid-Cap sector is highly volatile. If they can deliver outperformance from other categories and their benchmarks by huge margins then they also get the most beating when equity markets are down. Where a large cap equity funds will restrict its fall the mid-cap fund has all potential to go down higher. This is primarily due to the underlying stocks they invest. During the market fall of 2015 some mid-cap stocks went down by as high as 80% while large cap faired better.  So if you have high exposure to this sector then you can expect a higher downfall in your portfolio from your peers who might be taking  more bet on large caps.

The Difference Within Mid Cap Funds

Even among this category, investors will see variance in the performance which arises due to the difference in the underlying strategies.  Since the universe of mid-cap stocks is smaller the funds adopt  different strategies to deliver the performance. While a fund like IDFC Premier Equity Fund is high on portfolio churning as can be inferred from its  turnover ratio of more than 200% funds like Franklin India Smaller Companies fund do not adopt this strategy where its turnover ratio is only 6%. Similarly many funds keep  a small exposure in large cap stocks but there are funds like DSP Small Cap Fund which invest completely in smaller stocks and do not bet on large-cap stocks. Apart from this, the sector where these funds invest can also create a difference. While most of the mid-cap funds take a blended approach i.e. they invest in growth oriented companies and take a value based approach too, some funds still can go with cyclical investing and can vary the exposure as per the market scenario. Thus, the difference in underlying strategies is what can differentiate even within mid and small cap funds which one has to analyze and where fund manager role becomes more important.

What You Should Do?

Going with midcap funds can be rewarding for your investment portfolio considering the returns they can deliver. However, you need to be tolerant enough to bet completely on them.

Ideally, a mid-cap exposure of 25-30 % in your portfolio should be good. Investors who take a higher bet, being attracted by fascinating returns, should remember that their portfolio can see much higher downfall during adverse scenario. Above this selecting a midcap equity scheme needs credit to fund manager also. Funds where the fund manager sticks longer do well in longer term than funds which see a higher movement. Lastly, the corpus of the fund may be a drawback considering the limited scope of mid-caps stocks. ICICI Pru Discovery is a multi-cap fund now. So invest in mid-cap funds to enhance your portfolio returns but do a wise selection, aim longer horizon and keep a diversified portfolio.

Are you invested in mid cap? What is your total exposure ? Do you get concerned looking at your investment portfolio?

Share your views in the comments section….

The above article was first written for moneycontrol.com