There is an increasing inflow of money into midcap funds the reason being higher returns that make up for the volatility and the risk involved. Details received from the Association of Mutual Funds in India (AMFI) highlight how the number of systematic investment plans (SIPs) has gone up considerably even in the face of global tensions. Apart, the contribution of SIPs in midcap funds went up to ₹2151.15 crore in September from ₹1479.42 crore in August this year.
Investors’ growing interest in these funds can be attributed to the consistently growing returns earned by midcap companies, thus, lending a huge boost to midcap funds. Recently, the JM Financial Group came up with the JM Midcap Growth Direct Plan new fund offer. Launched on October 31, 2022, this fund is on offer till November 14, 2022.
A comparison of historical returns over the past five years shows higher yields in midcap mutual funds than in large-cap ones.
A major percentage of equity funds invest in large-cap companies. However, data indicate how many midcap companies have grown into large-cap companies over the period. Also, many companies categorised as midcap have continued to grow more steadily than some of the biggest large-cap companies. However, despite many growth points being in favour of midcap companies, is it worth investing heavily in them?
Chasing returns
Returns in future need not necessarily mirror past returns. However, investors continue to be enthused by past returns and put their money in funds that have earned considerably in the last three to five years. Many personal financial analysts describe this as performance-chasing behaviour that is based purely on mindset and yearning to earn more in less time. In this race for higher returns and profits, many overlook stock valuations that drive returns while lessening the risk in investments.
Preeti Zende, Founder and owner, Apana Dhan Financial Services says, “Mid-cap funds are vulnerable. The volatility in such funds is higher than the large-cap. So, when the market corrects it can have major fall in the NAV. Not all companies which are categorized as midcap have the potential to perform consistently so only a handful of such stocks can provide alpha year on year. Investors should never invest the majority of their money in midcap funds.
These funds can be a part of your satellite portfolio. Your core portfolio should always consist of Index and large-cap funds. Before investing in midcap funds investors should access their risk-taking ability and should know their capacity to digest the volatility midcaps can offer. Investment in midcaps funds should be done only for long-term financial goals. You have to have more than 10-15 years of investment horizon for these to generate good long-term returns.”
The idea behind putting money in midcap funds is to earn from midcap investing. However, not all midcap funds earn simultaneously and similarly. Does it mean that we must invest in more than one midcap fund?
Rajani Tandale, Product Head – Mutual Fund, 1finance.co.in says, “Midcaps stocks are categorised from 101 to 250 using market size as a benchmark, according to the SEBI classification of mutual fund schemes. This implies that fund managers must only build their portfolios using this universe. Returns of mid-cap schemes vary from the scheme as every scheme will have different strategies, in spite of this there are chances of overlapping portfolios of different fund houses. If you look at the past history every time the No. 1 position of the midcap scheme keeps changing because certain stock or sector performs well and accelerates the fund returns to the top spot, However, sustaining the top returns is the major challenge.”
Explaining investors’ choice of funds and how they must decide where to invest, Tandale adds, “We suggest choosing funds based on the fundamental ratios rather than chasing the top returns. Midcap Index funds/ ETFs are also a good option to stay investing for the long run as they are cost-effective and better performing compared to active funds although one should seek professional advice before investing in midcap funds to align your financial goals with investments.”
Volatility is an inherent aspect of many midcap funds. Many midcap funds park investors’ earnings into stocks of large-cap companies, thus, shielding them from sudden and drastic market movements. However, others put money into potential small-cap stocks too, thus, making them prone to frequent price fluctuations.
Inherent risks
The current market conditions are shaky owing to geopolitical tensions, continuously growing inflation and the constant fear of recession. This can cause investments in midcap funds to be risky. Though midcap funds charge lower expense ratios and turnover ratios than actively managed large-cap funds, variability in the short term can cause many investors to feel afraid and upset. This explains why these may not be the right investment fit for short-term investors.
Rohit J. Gyanchandani, Managing Director, Nandi Nivesh Private Limited says, “It entirely depends on one’s risk profile. These investments can be limited to 10-15 per cent for a moderate investor while aggressive investors can go up to 20-25 per cent. Mid-cap funds carry higher volatility when compared to flexi caps or large caps. However, for an investor with a horizon of seven years or above, an allocation of 15-20 per cent in mid-cap schemes can increase the overall returns on the portfolio.”
One must know that these funds deliver much better returns only if held for a prolonged period. Risk-averse investors must abstain from including them in their investment portfolios.
