Among various categories from equity mutual funds, mid cap funds 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 other side they also get the most of the beating when market is 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 in mid-cap equity funds or stay away from it or invest partially. Here we understand the category and why mid cap equity funds, despite its inherently risky nature, can enhance your portfolio returns-
Performance
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 have 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%. While analyzing the calendar year performance, in 2015 large cap was down by almost 2% while mid and small cap index have 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%.
So the historical picture shows that mid and small cap tend to deliver superior returns but also tend to fall higher during market downfall.
The Risk
Mid Cap segment 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 the markets are down. Where a large cap equity funds will restrict its fall the mid cap fund has all potential to go down. This is primarily due to the underlying stocks they invest. During the market fall of 2015 some mid cap stocks crashed by as high as 80% while large cap remain on course. So if you have high exposure to this sector then you can expect a higher downfall from your peers who might be taking bet more on large cap.
The Difference In Mid Cap funds
Even among the 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 Funds is high on portfolio churning as can be infered from its turnover ratio of more than 200% funds like Franklin India Smaller companies fund do not adopt this where its turnover ratio is only 6% . Similarly many funds keep small some exposure in large cap stocks but there are funds like DSP Small Cap Fund which invest completely in smaller stocks and do not take 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 that is they invest in both growth oriented companies and value bets, some funds still can go with cyclical investing and can vary the exposure as per the market scenario. Thus the difference in underlying strategies can differentiate the performance of various schemes. Hence the 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 must be invested for a long time period and stay with till the cycle unfolds.
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 which they should be ready to bear. Fund manager is an essential ingredient to the success of a mid cap fund. Funds where fund manager stick longer do well in long 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. For example, ICICI Pru Discovery has become a multi-cap fund now. Invest in mid-cap funds to enhance your portfolio returns but do a wise selection, aim longer horizon and do not bet too much of your money.