Mutual funds

Mid Cap funds are mandated by SEBI as per its October 2017 guidelines to invest at least 65% of their corpus in mid cap stocks. As per SEBI definition, mid cap stocks are those companies which rank from 101 to 250 in terms of market capitalisation. The stated objective of SEBI in carrying out this strict categorization of Mutual Funds is to simplify the various offerings so that investors can pick from the universe of schemes that best suit their risk profile. A little extra flexibility has been provided to mid cap funds as they are mandated to invest only 65% corpus in mid cap stock wheres the Large cap funds are mandated to invest 80% of their AUM in the top 100 listed stocks by market capitalisation

Further as per SEBI’s new guidelines effective from February 1, 2018 SEBI the watchdog for Indian Mutual Fund Industry mandated that all fund houses will have to benchmark their equity and balanced funds to Total Returns Index (TRI) instead of then prevailing practice of bench marking against Price Return Index (PRI). Total Returns variant of an Index (TRI) in addition to capital gains, also takes into account all dividends/ interest payments that are generated from the basket of constituents that make up the index . Hence TRI is more appropriates as a benchmark to compare the performance of mutual fund scheme.

Mid Cap Funds: Selection Criteria

  • Funds with AUM > 2000 crore . HDFC Mid cap opportunities has the highest AUM of ₹23,787.91 Crores  , but it fails in other selection criteria indicated below.
  • Fund Returns should have beaten the Bench mark Index in the 3 year time Horizon.
  • Crisil Rank of 1 or 2 . Crisil provides a single point analysis of mutual funds which takes into consideration key parameters such as risk-adjusted returns, asset concentration, liquidity and asset quality. The ranks are assigned on a scale of 1 to 5, with CRISIL Fund Rank 1 indicating ‘very good performance’. In any peer group, the top 10 percentile of funds are ranked as CRISIL Fund Rank 1 and the next 20 percentile as CRISIL Fund Rank 2.
  • Performance considered is for Direct Growth schemes.

Mid cap Mutual Funds meeting the Selection Criteria in alphabetical order are

  1. Axis Mid cap Fund
  2. DSP Midcap Fund
  3. Kotak Emerging Equity Fund
  4. Nippon India Growth Fund

Some Prominent Mid cap funds that do not make to this list are HDFC Mid-Cap Opportunities, Aditya Birla Sun Life Mid Cap, UTI Mid Cap, SBI Magnum Mid Cap, Sunda haveram Mid Cap, ICICI Prudential Midcap, L&T Mid cap, Mirae Mid cap, Edelweiss Mid Cap Fund, Tata Mid cap, Invesco Mid cap, BNP Paribas mid cap etc. Mirae Mid cap Fund has a history of less than a year.

Performance of Selected Mid cap Funds

All parameters indicated are for Direct Growth schemes as on 15-02-2020. Bench Mark Index for Comparison is S&P BSE 150 Mid Cap TRI (total Return Index). All returns indicated are % annualized Returns

Paramter/ MF
Bench mark
Axis
DSP
Kotak
Nippon
Rank-Crisil 1222
AUM (Crore) 4,8187,6266,7337,269
Exp ratio % 0.581.190.731.34
Return % 6m19.2621.3520.821.3617.78
Return % 1y16.9625.3124.0125.6122.45
Return % 3y8.7118.8110.2511.0911.01
Return % 5y10.1412.1211.7712.739.23
Beta0.710.820.840.84
Alpha9.142.232.722.2
Fund ManagerS DevalkarResham JainP TiberwalM Gunwani

Axis Mid cap Fund and Kotak Emerging Equity Fund have consistently outperformed other peers as well as the Bench mark index in terms of returns over all the four durations. Further Axis Mid cap Fund has the lowest expense ratio too followed by Kotak Emerging Equity Fund.

Portfolio (major Holding only) of these schemes can be seen from the Links indicated below

  1. Axis Mid cap Fund Portfolio
  2. DSP Midcap Fund Portfolio
  3. Kotak Emerging Equity Fund Portfolio
  4. Nippon India Growth Fund Portfolio

Mutual Funds: Statistical Measures

There are many parameters that are used to measure the volatility in performance and risk adjusted performance of a fund. We here limit ourselves to two statistical indicators alpha and beta.

In simple terms , Alpha represent the value that a fund manager adds or subtracts from a fund portfolio’s return. An alpha of 1.0 means the fund has outperformed its benchmark by 1%. Similarly , an alpha of -1.0 would indicate an under performance by the fund by 1%. 

Beta is a measure of the volatility, or the systematic risk of the fund portfolio with respect to the market in totality. A beta near to 1.0 indicates that the funds investment’s value will move in tandem with the market. A beta of less than 1.0 indicates that the funds NAV is less volatile than the market or benchmark. Correspondingly, a beta of more than 1.0 indicates that the funds NAV is more volatile than the market. A fund with beta of 1.3 is theoretically 30% more volatile than the market. Thus mutual fund schemes with a higher alpha and lower beta are considered as better performers under this framework.

Axis Mid cap funds scores high since both parameters indicated are for the 3 year tenure in which the fund has considerably outperformed other funds. It is followed by Kotak Emerging Equity Fund.

Midcap Funds : Year wise Returns

Since the present returns for different tenures are distorted by present NAV or short term performance of fund, it will be prudent to have a look at year wise returns of these schemes where the ups and down are more visible.

% Annulaized ReturnsBench mark (%)Axis (%)DSP (%)Kotak (%)Nippon (%)
2016-11.21-1.9211.45123.51
2017-6.343.639.844.9844.22
201817.154.62-10.5-10.71-10.9
201914.8612.869.2110.246.78
YTD2.076.766.167.127.28

Mid cap Funds : SIP Returns & IRR

The SIP amount from investing Rs. 10000 per month for 1 year, 3 year , 5 year are indicated for each of the funds. For a 3 year period the Internal rate of Return (IRR) per month and approximate annualized Return are also indicated. The value of investment after SIP are indicated in Rs. Lacs.

Amount in LacsAxis DSPKotak Nippon
After 1 yr SIP (Rs. Lacs)1.371.351.361.34
After 3 yr SIP(Rs. Lacs)4.584.154.184.12
After 5 yr SIP(Rs. Lacs)8.88.098.177.84
IRR ( per month)- 3 years1.26%0.75%0.79%0.72%
Approx annualized % p.a. Return16.26%9.44%9.93%8.95%

If we look at one year SIP returns, the differences between these funds are not very significant though Axis and Kotak remain high in the order. Five year SIP returns point to significant Gap in performance. Axis mid cap fund has returned an IRR (internal rate of return) of 1.26% per month followed by .79% by Kotak Fund in the mid cap space. However this variation if calculated will be less for 1 year period.

Assessment and Comments

  • These funds invest in medium-sized companies. Compared to those funds that invest in large caps, such mid cap funds tend to fall more when stock prices fall. So while they have potential to offer higher returns in the long-term or even medium term, there could be more severe ups and downs.. The Funds may still be suitable for a longer investment horizon typically extending over few years to achieve superior returns and long-term financial goals. 
  • Nevertheless an investor can plan to dedicate a small portion of his folio to a good performing mid cap funds as values of many mid caps is in general is relatively reasonable compared to large cap funds and their returns can differ from other categories thus providing an element of diversification. Further Mid-sized companies are many times in the middle of growth trajectory and can quickly graduate to large caps where they enjoy better valuations.
  • By going for SIP in place of Lump sum Investments, investor is relatively better shielded against adverse performance in a particular period.
  • Historical performance of funds is not a good indicator of their future performance. Individuals can go through the portfolio of funds to make their own assessment.
  • Based on past data, Axis Mid cap fund followed by Kotak Emerging Opportunities fund in the mid cap equity mutual fund schemes have delivered a good performance.
  • The performance of the mid cap funds before Oct 2017 before SEBI category rules came into force, may also be boosted by the fact that mid cap funds had freedom even to invest in other equity categories and thus while the Bench mark mic cap BSE Index gave a -ve return, most mid cap funds managed to give upbeat returns in those year and immediately thereafter at least for one year that performed quite poor;y compared to mid cap Sensex as a fallout of this SEBI exercise which under the given market conditions favored Large cap funds.