When investors invest in a blend of large & mid-cap, multi-cap or value-oriented funds, some part of their portfolio is already invested in mid-cap companies.
Mid-Cap Schemes: As the stock market turned volatile and fell by over 30 per cent after the outbreak of COVID-19 pandemic, the mid-cap funds witnessed a large erosion in the NAVs for most investors. While the economic impact is yet to be seen, the markets have rebounded and so have the values of some mid-cap funds. Over the last 3 months, mid-cap funds have generated between 12 per cent and 30 per cent! However, that does not take the fact away that short-term performance should not be seen while picking funds.
The return potential of mid-cap stocks is perceived to be more than other stocks in the long run. After all, successful mid-cap companies are those who are thought to deliver consistent performance over a longer time frame.
SEBI definition of mid-cap funds
As an investor, remember that mid-cap funds invest in mid-cap stocks and hence don’t go by the reputation or the market perception of a company. Rather, look at its market capitalisation as they are not among the top 100 companies in terms of market capitalisation. “As per SEBI, 101st to 250th company in terms of market capitalization are defined as mid-cap companies and mid-cap funds invest a minimum 65% of their assets in these companies,” says Harshad Chetanwala, co-founder of MyWealthGrowth. The mid-cap stocks will not enjoy the liquidity, research and interest among bigger institutions and foreign participants as much as large-cap funds will do.
Mid-cap fund performance
Over the last 1-year, mid-cap schemes have given returns between 3 per cent to a negative of 28 per cent. “In last one year the performance of both large-cap and mid-cap companies is almost identical, an investment of Rs.100 a year ago would have become Rs.87.98 in S&P BSE Sensex and Rs.87.68 in S&P BSE Mid-cap Index. This, of course, includes the fall from a peak of 17 Jan and the recovery in the last couple of months. In the long run investment of Rs.100 ten years ago would have become Rs.199.41 in S&P BSE Sensex and Rs.183.33 in S&P BSE Midcap,” informs Chetanwala.
Mid-cap funds out-performance
There could be periods in-between where the mid-cap funds may outperform large-caps.”There were occasions during this 10 year period when mid-caps have performed better than large-caps, this was from Aug 2015 to Aug 2018,” says Chetanwala. For an investor, it, therefore, makes more sense to pick the right scheme and stay invested for the long term.
Choosing the right mid-cap fund
As it goes for every MF, do not consider the short-term performance. The reason is that a longer-term performance will show how consistent has the fund been over a longer time frame and across different market cycles. “One of the ways to assess the right mid-cap fund is based on how the fund has performed during good and bad market cycles, it not just give insights on quantitative aspects but also qualitative aspects of the fund. One can also look at the risk-adjusted ratio of the funds, better the ratios better the fund is from an investment perspective,” says Chetanwala. The fund manager’s ability to ride the storm over longer periods can best be gauged by looking at longer-term performance against its benchmark.
Mid-cap stocks take time to become market favourite. But, when they are identified by market participants as the potential winner of tomorrow, the investors can expect gains. Chetanwala says “Since mid-caps funds invest more than 65% in emerging companies and these companies take time to unlock their growth potential, the holding period should be a long term a minimum of 7 years. Longer the holding period better in case of mid-cap funds, hence they are ideal for long term financial goals.”
While the return potential can be huge over the long term, the risk is equally high in mid-cap funds. The NAVs may fall considerably over the short-medium term. Hence, evaluate one’s risk profile before investing in them. Chetanwala shares a piece of advice for the investors at large: It is not necessary for all investors to have an allocation in mid-cap funds. When investors invest in a blend of large & mid-cap, multi-cap or value-oriented funds allocation of their portfolio is already invested in mid-cap companies. This allocation may range from 15 – 30% depending on the portfolio of the funds. Hence, a part of their investment will always be in mid-cap to give them the benefits of returns from mid-cap companies.
The high performance of funds may change over time. The top funds may not remain in the top quartile always. Even if you are investing in them, diversify across 1-2 mid-cap schemes and ensure they have varying sector allocation. And, most importantly, mid-cap funds do not make up the core of your investment portfolio. “Hence, depending on the risk appetite and time horizon of the investor there can be 15 – 25% allocation in mid-cap funds,” adds Chetanwala.