Mid Cap funds have outperformed large-cap funds, and the trend is not likely to change anytime soon.
When a mutual fund is described in terms of market cap (i.e., small cap, mid cap or large cap), it indicates the size of the companies in which the fund invests, not the size of the mutual fund itself. Market cap is calculated as the number of shares outstanding multiplied by the current market price of one share.
Mid caps are the stocks that fall between the large cap stocks and small cap stocks. These represent mid-sized companies that are relatively more risky than large cap as investment options yet, they are not considered as risky as small cap companies. Mid cap stocks as an investment tend to reap higher returns in 3 to 5 years when compared to large cap stocks that usually provide moderate returns with exposing investments to low risk during the investment timeframe.
The stocks that are being labelled as mid and small cap stocks presently are potential large cap stocks of tomorrow. Experts are of the opinion that if an investor wants to be a part of India’s growth story, a portion of investments should be done in Mid and Small Cap Funds. The major investments of small and mid cap funds in the 1990s in stocks of telecom, technology, private banks and so on are large cap stocks presently. The same prediction applies for the present small and mid cap funds.
Mid Cap funds don’t always move with the broader market, and they are also usually not as prone to violent swings as small caps. Mid Cap companies share some of the growth characteristics of small-cap companies, but they entail less risk (at least in theory) because they are slightly larger.
- To be a part of Core and Satellite Portfolio.
- Provides better returns to your overall portfolio for an average investor over a long period of time.
Approximate Returns Possible:
13% – 25%
Criteria for choosing these funds:
- Fund Returns – Rather than chasing High Peak Returns across the categories, preference was given to consistent High Returns.
- High Alpha – Alpha tells you whether the fund has produced returns justifying the risks it is taking. It does this by comparing its actual return to the one ‘predicted’ by the beta. Say, a fund can be expected to earn a return of 15 per cent in a year (based on its beta). However, it actually fetches you 18 per cent. Then the alpha of the fund is 3 (18 – 15 = 3). In other words, alpha is a measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market return.
- Lower Standard Deviation – Standard Deviation (SD) of a fund depicts, that how much the returns of the fund have deviated from the mean level. The higher the value of standard deviation, the greater will be the volatility in the fund’s returns.
- Fund Risk Grade – The risk of investing in a mutual fund not only includes the possibility of losing money, but also the chance of earning less than you would have on a guaranteed investment.
- High Sharpe Ratio – Sharpe ratio represents this trade off between risk and returns. At the same time it also factors in the desire to generate returns, which are higher than those from risk free returns. As standard deviation represents the total risk experienced by a fund, the Sharpe ratio reflects the returns generated by undertaking all possible risks. It is thus one single number, which represents the trade off between risks and returns. A higher Sharpe ratio is therefore better as it represents a higher return generated per unit of risk. The Sharpe ratio is one of the most useful tools for determining a fund’s performance.
- High Sortino Ratio – One refinement of Sharpe is the Sortino Ratio, which uses only downside variance. It is the statistical tool that measures the performance of the investment relative to the downward deviation. The Sortino ratio is similar to the Sharpe ratio, except it uses downside deviation for the denominator instead of Standard Deviation (SD).
- R-Squared – The R-squared value shows how reliable the beta number is. It varies between zero and one. An R-squared value of one indicates perfect correlation with the index. Thus, an index fund investing in the Sensex should have an R-squared value of one when compared to the Sensex. For diversified equity funds, an R-squared value greater than 0.8 is generally accepted to mean that the underlying beta value is reliable and can be used for the fund.
- Beta – Beta is a statistical tool, which gives you an idea of how a fund will move in relation to the market.
- Expense Ratio – Expense ratio is the percentage of total assets that are spent to run a mutual fund. This involves the fund management fee, agent commissions, registrar fees, and selling and promoting expenses. All this falls under a single basket called expense ratio or annual recurring expenses. Expense ratio states how much you pay a fund in percentage term every year to manage your money. For example, if you invest Rs 10,000 in a fund with an expense ratio of 1.5 per cent, then you are paying the fund Rs 150 to manage your money. In other words, if a fund earns 10 per cent and has a 1.5 per cent expense ratio, it would mean an 8.5 per cent return for an investor. Since this is charged regularly (every year), a high expense ratio over the long-term may eat into your returns massively through power of compounding. For example, Rs 1 lakh over 10 years at the rate of 15 per cent will grow to Rs 4.05 lakh. But if we consider an expense ratio of 1.5 per cent, your actual total returns would be Rs 3.55 lakh, nearly 14 per cent less than what would have been achieved without any expense charge. Securities & Exchange Board of India has stipulated a limit that a fund can charge. Equity funds can charge a maximum of 2.5 per cent, whereas a debt fund can charge 2.25 per cent of the average weekly net assets. Lowest Expense Ratio is not considered here because it may mean lower returns also because of low involvement of high quality teams to manage the funds. To keep the expenses low, investment in Direct plans of corresponding Mutual Fund can be chosen.
Taxation / Expenses:
No tax to be paid on redemption if Units held for more than 1 Year. Barring a few funds, many of the funds do not charge any Exit Load if the redeeming after 1 year.
For Many of the funds, once the redemption request is placed the funds will come in bank account within 3-5 working days.
- IF SIP is done, then while withdrawl we need to take care that we can redeem only those number of units which have completed 1 Years of period to avoid Exit Load and Tax.
- It is advisable to invest in Joint Holding.
- Exit load will differ with respect to different funds.
- Please read the Fund Factsheet for more details before investing.
List of Funds:
We have shared the top picks among Mid Cap Equity Mutual Funds based on the criteria as mentioned in the article.
Mid Cap funds can be great investment vehicles for investors seeking a fund with great return possibilities – without the risk of small caps – and index-related returns like those of large caps.r