Mid-Cap Funds A Better Choice

One of the biggest reasons why an investor invests in any security is to generate better returns. Mid-cap funds are the ones that will help him to achieve this objective. But that is not the only reason. Mid-cap funds tend to generate returns better than the large-cap funds in the long run. Read on to understand why

As with a pendulum effect, after showing extraordinary return in the year 2017, mid-cap funds for the next two consecutive years i.e. 2018 and 2019, on average, posted a sharp underperformance. While in 2018 mid-cap funds generated a negative return of 12 per cent, large-cap funds yielded marginally positive returns. Nonetheless, on an average, year-till-date in CY20 mid-cap funds have outperformed the Nifty 50. Meanwhile, large-cap-dedicated funds, on an average, are up by around 5 per cent year-till-date and the mid-cap dedicated funds are up by 13 per cent.

The chart alongside clearly shows that there is no single incidence since the year 2012 when mid-cap funds on average have underperformed large-cap funds for two consecutive years. The last time they underperformed was in 2013; post that in 2014 mid-cap funds almost gave returns twice that of the large-cap funds. For the next two years also they continuously outperformed large-cap dedicated funds.. Therefore, we see that once the mid-cap funds underperform the large-cap funds for any period of time, they tend to return with vengeance.

Moving beyond the annual (calendar year) performance, we tried to analyze the pattern of returns of large-cap and mid-cap funds through their respective indices. For this, we checked their three years’ rolling returns of Nifty and Nifty Mid-Cap 150 since 2005 as annual returns calculated above give us limited data to assess the true pattern of returns of large-cap and mid-cap categories.

Three Year Rolling Returns of Large-Cap & Mid-Cap Indices

What we observed is that after underperforming in 2013, mid-cap funds gave superlative returns for the next three years. Between the start of 2014 and the end of 2017, we saw that the mid-cap index gave a cumulative return of 246 per cent compared to 172 per cent return given by the large-cap index in the same period.