Despite a volatile financial year for the Indian equities, a majority of the mid- and small-cap funds managed to beat their underlying benchmark indices.
These funds have given average category returns of 4.43% in FY13, comfortably beating the returns given by CNX Midcap (-4.02%) and S&P BSE Midcap (-3.22%), according to data collated from Morningstar India. About 87% out of a universe of 68 such schemes considered managed to achieve this feat. However, large-cap funds, with average category returns of 4.83%, still managed to outperform their mid- and small-cap peers in FY13.
Experts attribute this outperformance to better stock-picking by fund managers. ?The fund managers have kept a preference for quality names and avoided some of the over-leveraged companies, which got hammered in the recent correction,? said Dhruva Chatterji, senior research analyst, Morningstar India. ?These funds have also allocated about 10-20% of their portfolio to large-cap stocks, which has helped them in tough times.?
SBI Emerging Businesses Gr has emerged the top performer among small/mid-cap funds for a one-year period with returns of 20.7%. Taurus Discovery Gr (17.8%), Birla Sun Life India Gen Next Gr (17.3%), Axis Midcap Gr (15.3%) and Franklin India Smaller Companies Gr (15.1%) have been the other top performers in FY13. The small/mid-cap funds that have fared the worst in FY13 include Sahara Star Value Gr (-14.3%) and Reliance Infrastructure Gr (-21.8%). Even in the last quarter of the financial year, small- and mid-cap funds outperformed their benchmark indices, with average category returns of -10.65% compared with -12.9% and -13.6% returns for the CNX MidCap and S&P BSE Midcap indices, respectively.
SBI Emerging Businesses Gr has been among the most consistent performers with annualised three-year and five-year returns of 15.5% and 10.3%, respectively. The other consistent performer has been Birla Sun Life India Gen Next Gr, which has given returns of 12.7% and 11.02%, respectively, in the same period.
Small/mid-cap funds tend to outperform in a bull market when the equity market outperforms. For instance, in CY07 and CY09 when the BSE Sensex rallied 47% and 81%, the small- & mid-cap funds outperformed large-cap funds by a decent margin ? 3.26% and 16.9%, respectively.
However, these funds tend to underperform in bear markets. For instance, in CY08 and CY11, the small/mid-cap funds underperformed their large-cap peers by 6% and 0.55%, respectively.
?Investors should note that small/mid-cap funds, due to their inherent nature, are more volatile and also riskier than their large-cap peers,? said Chatterji.