Mutual Fund

Category Review: Mid Cap Funds

Mid Cap funds have investments in companies which are still growing and have more potential to grow. let’s start with the disclosure that the below funds are not a recommendations but the broad comparison of the funds in same category to help us shortlist the consistent funds. Selection of a fund in your portfolio is dependent on lot of other factors including your asset allocation, time horizon and risk profile.

What are Mid-cap funds? What is their risk & return profile?

As per the latest SEBI guidelines, Mid-cap funds should have a minimum investment in equity & equity related instruments of Mid-cap companies 65% of total assets. It is an open ended equity scheme investing across Top 101-250 by Market Cap. So in theory, the fund manager has the range of stocks to pick most of these stocks are well researched and followed by investing community in India. The opportunity to generate alpha against index is a possibility given lot of these stocks are in growth trajectory as well as they are not very well followed by the Large FIIs given the limited liquidity. At the same time, due to limited institutional holding the issue of corporate governance can be overlooked and can trigger more defaults.

The CAGR return for the category has been in range of 4-5% over the last 3  years given the correction in that segment since the start of 2018. Over 5 years, funds have performed decent with average returns of 9-10%. The PE valuations have corrected from the highs at the 2017 Dec levels, Though the mid-cap returns and directions are highly correlated to Nifty index as well 70-90%.  If Nifty valuations stays high and earning growth does not return this will stay in the similar ranges or lower range as of today over next 1-2 years (Read: Lessons from Nifty History).

Mid-caps are always positioned as a category to generate better returns though people dis-regard the risk they comes with. Below is the chart to reflect that on average they do have a better returns but returns distribution is too wide from -70% to +165% on a one year basis vs Large cap where returns are more centralized.

Large cap vs Mid cap

Who & when should we invest in these funds?

If you have a long investment horizon (5-7 years+), and can stomach the volatility of returns then this is one of the category to look for. Please note that investing for long time horizon does not mean better returns but it means to reduce the risk of returns being negative

Secondly these funds need to be more tactical in nature and not more than 20-25% of your core Portfolio given their higher volatility. This fund category is more to generate alpha by using them as satellite to your core portfolio, similar to small caps or sector funds. (Core & Satellite Portfolio). For core portfolio it should be Large cap, ETFs or a Multicap fund.

Which are the best funds in this category?

This is a category of funds, Some will fall in love while others will hate them to core depending on their experiences. Actively managed funds will be a better option for at least over next decade given the volumes and breadth of the stocks. Here are my picks,

  1. Kotak Emerging Equity
  2. L&T Midcap
  3. Franklin India Prima
  4. DSP MidCap
  5. Axis Midcap

Data is as of Aug 23th, Source: Value Research & Morning Star

Mid Cap funds.png

Those of you who hold the funds other than suggested, if your fund is in the top 5-10 of the category you can continue to hold it or think of opting from one of the Top 5 based on your preference. Do write to us for your feedback, queries and suggestions. if you like it, don’t forget to subscribe it. Read more category reviews: Large-cap fundMulti-cap fundSmall cap fundValue funds

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Mutual Fund

Category Review: Multi-cap funds

“Diversity brings about multi-dimensional lock to unlock those invisible, inaccessible and limited opportunities.” – Thabisile Ledwaba

As most of readers requested to write the fund reviews & recommendations for multi-cap funds as well, so here it comes. we will try to understand, what are these funds, who & when we should invest in these funds, which are the best funds in this category.

What are multi-cap funds? What is their risk & return profile?

As per the latest SEBI guidelines, Multi-cap funds should have a minimum investment in equity & equity related instruments of 65% of total assets. It is an open ended equity scheme investing across large cap, mid cap, small cap stocks. So in theory, the multi-cap fund manager has the largest buffet of stocks to pick and select from vs just any other market cap specific mutual fund category e.g. Large, mid or small cap.

As they have mix of large, mid and small cap stocks their volatility on average is on a higher side vs a Large cap fund. Though the better stock mix help them generate a better return over last five years as a category they have given ~1% extra returns vs their large cap counter parts.

Who & when should we invest in these funds?

This is much complex question to answer as it needs more careful evaluation for specific individual. Though the broad parameters which will continue to be applied in here are the market valuation levels, risk tolerance/ capacity and investment horizons. If you have a medium-long time horizon (5 years+), and need to invest say 30% of your portfolio in equities this is one of the category to look for and can be 30-80% of your equity allocation. [Also read How much equity should you hold]

Which are the best funds in this category?

The best funds here have a wide spectrum as i mentioned the fund managers have the wide buffet of the stocks to pick from and their fund management style will differ drastically from each other as well. Therefore, instead of just giving you simple recommendations, i will spend sometime to differentiate in their characteristics so that you pick the one which suits you best. first let us go through the list and ranking and Top 6 picks will be from Motilal to Parag Parikh and all in between.

Data is as of July 10th, Source Value Research & Morning Star, All parameters refer to 5 year horizon.

Multi-cap Funds

The important thing to notice here is that the fund like Motilal oswal has the minimum expense ratio, which meant most of the returns are attributed to investors and help them generate a larger Alpha/ out-performance. Also, There stock selection has been impeccable over last 5 years so their upside capture is best in category. On the other hand, Parag Parikh long term equity fund has not outperformed the markets in up cycle but still make it to the list due to high conviction bets with just 14% turnover as well as best downside protection. PPLTE has the best upside/downside capture ratio with lowest draw down among the funds. if you want to play like Sehwag, go for MO 35 and if you want to be dependable like Dravid go for PPLTE.

Those of you who hold the other funds, if your fund is in the top half of the category you can continue to hold it or think of opting from one of the Top 6 based on your preference.

Do write to us for your feedback, queries and suggestions. if you like it, don’t forget to subscribe it. Read more category reviews: Small cap fund, Value fund