Personal FnThe Best Mid-Cap Funds For 2019 - PFN
Mid-cap mutual funds aren't for fainthearted investors.
Are you one?
But if you have the stomach for high risk and want to create wealth at an accelerated pace over the long-term, consider allocating some portion of your investment portfolio to mid-cap mutual funds. You will learn how investing in mid-cap funds can help you in a BIG way.
What are mid-cap funds?
Simply put, mid-cap funds, as the name suggests invest in mid-sized companies and are highly volatile in nature. When markets are volatile, mid-cap funds might give you sleepless nights--- they have a tendency to plunge more. On the other hand, you can generate handsome returns when markets are on an upswing if you invest in mid-cap funds.
Mid-sized companies have the potential to grow at a faster rate (as compared to large-cap companies), subject to the nature of business, the scale of operations and how they manage their resources. Compared to large-caps they are less stable though and thus, mid-cap stocks are more volatile.
According to SEBI's categorisation guidelines, any equity diversified fund to be classified as a mid-cap fund has to invest at least 65% of its portfolio in mid-cap stocks. In other words, it has to hold 65% of its portfolio in 150 stocks ranked on their total market capitalisation- starting from 101st stock to 250th stock.
Is investing in mid-cap funds really worth?
As, mentioned before mid-cap funds offer you the potential to generate significant wealth. However, do note that there is substantial risk involved.
Chart 1: Where are mid-cap funds placed on the risk-return spectrum?
(Note: For illustrative purpose)
On the risk-return spectrum, mid-cap funds are placed just a level below small-cap funds. Hence they are very-high-risk very-high-return investment proposition.
Table1: How have mid-cap funds fared in 2018?
Scheme NameAbsolute (%)CAGR (%)
1-year returns5-year returns
Invesco India Midcap Fund-3.623.5
Taurus Discovery (Midcap) Fund-6.621.0
Franklin India Prima Fund-8.523.0
DSP Midcap Fund-9.422.2
ICICI Pru Midcap Fund-9.821.8
HDFC Mid-Cap Opportunities Fund-10.221.9
Reliance Growth Fund-10.318.2
Kotak Emerging Equity Scheme-10.725.1
L&T Midcap Fund-11.225.2
Motilal Oswal Midcap 30 Fund-11.5--
S&P BSE Mid-Cap - TRI-12.519.7Data as on February 02, 2019
(Source: ACE MF)
*Please note, this table only represents the best performing mid-cap funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully.Past performance is not an indicator for future returns. The percentage returns shown are only for an indicative purpose.
If you rank all diversified mutual funds based on absolute returns over the last 1 year, you may not find mid-cap funds in the top-10 or even in top-20s. But, if you evaluate the returns over a period of 5 years; many mid-cap funds have displayed a stellar show, placing them in the top-10 or top-20 positions.
Some of the worthy mid-cap schemes are HDFC Mid-Cap Opportunities Fund and Franklin India Prima Fund. Both these funds have shown superior performance and consistency on all parameters and adequately compensated investors for the level of risk taken.
The other schemes that have shown a decent performance are:
✓ Invesco India Midcap Fund
✓ DSP Midcap Fund
✓ Kotak Emerging Equity Scheme
✓ Reliance Growth Fund; and
✓ Sundaram Mid Cap Fund
These schemes have managed to outperform S&P BSE Mid Cap Total Return Index (TRI) over longer time frames and across market cycles, outperforming the category average return.
Wrong ways to pick a mid-cap fund:
By giving undue importance to returns generated by a scheme during bullish phases
Not considering the track record of the scheme in handling downside risks
Giving importance to the short-term market outlook
Ignoring your personalised asset allocation
Depending extensively on the past track-record of a scheme
Relying blindly on star-ratings
Disregarding qualitative aspects associated with mutual fund selection
Relying on the advice given by friends and relatives unqualified to give you advice on mutual funds
Here's how you should select a mid-cap fund...
Performance and risk analysis
This is to analyze if the mid-cap fund has shown consistency in performance across various market periods with decent risk-adjusted returns.
Under this, the fund needs to be ranked on quantitative parameters like rolling returns across short-term and long-term periods, such as 1-year, 3-year, and 5-year, and on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.
Performance across market cycles
You need to ensure that the fund has the ability to perform consistently across multiple market cycles. Therefore, you should compare the performance of all the available mid-cap funds vis-a-vis their benchmark index across bull phases and bear market phases.
A fund that performs well on both sides of the market should rank higher on the list.
Adequate Diversification - The scheme should not hold a highly concentrated portfolio. The portfolio should be well-diversified and the exposure to the top-10 holdings should be ideally under 50%. In fact, mid-cap funds should have even lesser concentration, say 35%-40%.
Low Churn - Engaging in high churning can result in trading and high turnover cost. Therefore, you also need to consider the portfolio turnover ratio and expenses, and penalise funds involved in very high churning, i.e. those funds with a turnover ratio of more than 200%.
Quality of Fund Management
You also need to consider the fund manager's experience, his workload, and the consistency of the fund house. Therefore, assess the following criteria:
The fund manager's work experience - He/she should have a decent experience in investment research and fund management, ideally over a decade.
The number of schemes managed - A fund manager usually manages multiple schemes. Thus, you need to check if the fund manager is not loaded with a large number of schemes. If he is managing more than five open-ended funds, it should raise a red flag.
The efficiency of the fund house in managing your money- Ensure that the mutual fund house has a track record of consistent performance across schemes. Find out if only a few selected schemes are doing well. A fund house that performs well across the board is an indication of sound investment processes and risk management techniques in place.
Know more about PersonalFN's research methodology here.
Watch this short video on selecting mutual fund schemes:
Should you invest in mid-cap funds in 2019?
Broadly, mid-cap stocks have fallen in the range of 10%-40% from their peaks. As a result, the valuations have become less expensive. However, due to lack of growth in corporate earnings, mid-cap stocks are still trading at premium valuations as compared to large caps.
Chart 2: Mid-caps are still expensive...
Data as on February 05, 2019
Thus, you shouldn't invest aggressively in mid-cap funds just because many stocks in that space have fallen significantly and the Net Asset Values (NAVs) of mid-cap funds are off their peaks.
If you want to accelerate your returns in the long run, you might invest in mid-cap funds in a piecemeal manner. You should prefer Systematic Investment Plans (SIPs) over lump sum investments as they offer you a benefit of rupee-cost averaging. SIPs also save you from the risks associated with timing the market. Investing in direct plans helps you save costs, which, eventually boosts your returns.
How much should you invest in mid-cap funds?
That depends on your age, financial goals, risk appetite, and time horizon. If you are young and have a high-risk appetite, you might invest upto 40% of your equity portfolio in mid-cap funds.
But if you are going to retire in the next 7-8 years, you might restrict your mid-cap fund exposure to 10%-15% of your equity portfolio even if you have a high-risk appetite.
Remember, invest only if you have the stomach for very high and have a fairly long investment time horizon of at least 7 years.
The outlook for mid-cap funds in 2019
The year 2019 is expected to be a year of high volatility. Globally, economic growth is expected to soften. Any unexpected development on trade relations among major countries of the world, uncertainty about Brexit, and fear of a slowdown in China are important factors to watch out for.
Speaking about India, despite investors waiting patiently for 5-6 years, corporate earnings, especially of mid-cap companies have failed to rise as expected.
There hasn't been any respite on the bad loan front for Indian financial institutions. There's financial stress in a whole host of mid-sized companies. Due to soft demand, the chances of witnessing an exceptional earnings growth are remote. Valuation, perhaps, don't reflect these factors completely as of now.
Besides, as we are approaching the Lok Sabha elections, volatility in the market is likely to rise. If Foreign Institutional Investors (FIIs) turn negative post elections and continue to pull out money from Indian markets, as they did throughout 2018, then markets may witness topsy-turvy movements.
So far, domestic inflows have been robust, thanks to the investors' faith in SIPs. However, a prolonged lull in the market may make novice investors jittery. If they stop investing markets, there wouldn't be another prop for the expensive Indian markets.
On this backdrop, only tactical allocation to mid-cap funds based your personalised asset allocation plan is warranted in 2019.
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