Choosing the Best Mid-Cap Funds for 2021

When it comes to making the most of the mid-cap space, you have a range of options available. Let's explore these options and understand how they have fared in the past decade.

Types of Mid-Cap Funds

There are three primary types of mid-cap funds you can consider:

Actively Managed Schemes: These are funds where the portfolio managers take a proactive approach in selecting and adjusting the fund's holdings. They should ideally outperform indices like NIFTY Midcap 150. Index Funds: These are passively managed funds that track specific indices and aim to replicate their performance. Factor Funds: These are funds that focus on specific factors such as quality, value, or momentum to generate returns.

Analyzing the Performance of Mid-Cap Funds

We will begin our analysis with actively managed funds. Historically, they should outperform indices like NIFTY Midcap 150. However, in the past decade, most of these funds have not only beaten the benchmark but have also provided better returns to investors.

Active Managed Mid-Cap Funds

According to our data, 13 out of 16 actively managed mid-cap funds have consistently outperformed the NIFTY Midcap 150 index over the last decade. In fact, in 11 of these 13 funds, the minimum return for an investor who stays invested for 7 years is always higher than that of the index. For example, in the Invesco India Midcap Fund, an investor would have at least a 11.3% return after a 7-year investment period.

FundMinimum Return Invesco India Midcap Fund11.3% Other FundsDetails AvailableDetails Available

Yet, despite these positive returns, it's crucial to note that actively managed funds are not consistent performers. No active fund has been among the top 5 spots for three consecutive years. Therefore, while most active funds have outperformed the benchmark, there is no guarantee they will continue to do so.

Passive Managed Mid-Cap Funds

For investors who prefer a passive approach, there are also options available. There are three midcap indices (NIFTY Midcap 150, NIFTY Midcap 100, and NIFTY Midcap 50) for which you can find index funds or ETFs. NIFTY Midcap 150 has consistently outperformed the other two indices, providing a strong case for investing in these funds.

Factor Funds

Factor funds represent a newer and more niche option. Currently, the sole available factor fund is the NIFTY Midcap 150 Quality 50, which selects 50 “quality” companies from the NIFTY Midcap 150 index. The quality score is derived using factors like Return on Equity (ROE), financial leverage, and EPS growth. While the factor index was launched in 2019, back-tested data shows that its performance is similar to NIFTY Midcap 150, with both indices offering a Compound Annual Growth Rate (CAGR) of 14.85% over the last 5 years.

How to Invest in the Mid-Cap Space

Based on the analysis, here are the three primary approaches to investing in the mid-cap space:

Active Funds: With over 80% of active funds outperforming the benchmark, it is tempting to consider investing in them. However, these funds require constant monitoring and might need switching if they underperform. Index Funds: If you're not an active investor, index funds can be a better fit. You don't have to worry about underperformance or switching funds. This is because you will always get returns in line with the broader market. Factor Funds: This space is relatively new, but it offers a unique opportunity to take higher risks for potentially higher returns. You can invest a small portion of your equity portfolio in these funds.

Ultimately, the choice of fund should be based on your preference and risk tolerance, not solely on returns. By considering these factors, you can make a more informed decision about which mid-cap fund is best for you.

Do you have any questions or need further clarity on mid-cap funds? Share your thoughts in the comments below!