Do You Fear The Decline In Mid Cap Funds? Don’t, If You Invest The Right Way!
May 23, 2018

Author: PersonalFN Content & Research Team

Stock crash

Not too long ago, Mid- and Small Cap mutual funds were sitting on returns in excess of 40% over a 1-year period. Some schemes generated returns in excess of 50% in the 1-year periods ending in January 2018, a month when the market peaked to its all-time highs. It is natural to be lured by these supernormal returns.

At that point in time, PersonalFN had noted that it will be an imprudent strategy to increase exposure to mid and small cap funds. Do read the article here - 7 Mistakes Mutual Fund Investors Make At A Market Peak – And How To Fix Them.

Much was written about the valuations of mid-cap stocks. The then valuations seemed highly unsustainable and posed a high downside risk. Unsurprisingly, as on May 21, 2018, about four months later, the 1-year average returns have fallen drastically to about 10%-15%.

The party mid-cap and small-cap funds were enjoying seems to have ended.

Mid And Small Caps Take The Plunge
Mid And Small  Plunge
Data as on May 21, 2018 (Source: ACE MF, PersonalFN Research)

From the end of January 2018 up to March 2018, Indian stocks across the spectrum were in a free fall. The Mid Cap and Small Cap indices plunged by over 10%. Their larger peers proved to be more stable, halting the fall just above the 10% mark.

From the beginning of April 2018, the recovery started. However, the relief rally was short lived, and the mid cap and small cap indices are near where there were a couple of months back.

Large-caps on the other hand, proved to be more stable as they often do. The S&P BSE Sensex declined only marginally in comparison, by about 4-5%.

Euphoric gains do not last forever

A euphoric rise or a drastic fall of stocks is not new to the market. Over the market rally between May 31, 2004 and January 8, 2008, an investment of Rs 10 lakh in the S&P BSE Mid-Cap index would have grown to as much as Rs 52 lakh in the bull period. The S&P BSE Small-Cap index, on the other hand, would have grown your investment to an incredible Rs 76 lakh.

Euphoric Gains Were Short-lived
Euphoric Gains
Data as on May 31, 2009
(Source: ACE MF, PersonalFN Research)

But this massive rise soon came to an end. In the bear market that followed, between January 8, 2008 and March 9, 2009, the S&P BSE Mid-Cap and the S&P BSE Small-Cap collapsed by 74% and 79% respectively. Because of this, the resultant value of the portfolios was worth a mere Rs 13 lakh and Rs 16 lakh respectively.

A déjà vu in the offing?

Consider this, had you invested even in mediocre performing mid cap fund, when the market bottom in August 2013, your investment would have more than tripled by January 2018.

Working with the returns of the mid-cap index, an investment of Rs 10 lakh made in August 2013 would have be worth as much as Rs 35 lakh in January 2018, when the S&P BSE Mid Cap Index peaked.

A similar investment in small caps would have come just short of Rs 40 lakh, on taking the returns of the S&P BSE Small Cap Index. Thus, your investment would have grown by 3-4 times in less than five years.

However, here's the catch. The market correction of the past four months would have shaved off some of those gains. Based on the returns of the mid-cap index, your portfolio value would have declined from Rs 35 lakhs to just Rs 30 lakhs. For the small-cap index, the portfolio value declined to Rs 33 lakh from Rs 39 lakh. That's a notional loss of nearly Rs 5-6 lakh, though your overall returns would still be respectable.

Will History Repeat Itself?
History Repeat
Data as on May 21, 2018
(Source: ACE MF, PersonalFN Research)

On the other hand, if we consider the large-cap S&P BSE Sensex. Over the period from trough to peak, the Rs 10 lakh portfolio would have grown to Rs 20 lakh. However, as the correction that followed was not so steep, the portfolio value declined to Rs 19 lakh.

That's the risk of investing in mid-and small caps. While the gains are attractive, the losses too, can be severe. This has been witnessed in the past as well.

While the returns in the recent bull market are subdued when compared to the 2004-2008 period, will mid- and small-caps continue to slip further? Only time will tell.

Though valuations have cooled significantly, the price-to-earnings ratios, one measure for market valuation, are still well above their long-term average. Hence, volatility is expected to persist. The global and domestic backdrop is not too encouraging either. But this does not mean you should sell your investments. Stick to your financial plan.

Do Read:

Top 5 Reasons To Sell Your Mutual Fund Schemes

To deal with such uncertainty, it is always best to stagger your investments and invest regularly via a Systematic Investment Plan (SIP). You will save yourself from the stress of deciding whether now is a good time to invest in mid-cap funds.

In addition, if or when the market does correct, you will get the prefect opportunity to buy more units and lower the average cost of your investment.

PersonalFN believes that investors must adopt a logical approach when dealing with market volatility. If you sit on the side-lines waiting for a further correction, you may be left behind and will miss the wealth-creation potential of mid-cap funds.

Additional Reads:

Best Midcap Funds For 2018. Look Before You Leap!

Is Your Mid-cap Fund Equipped To Handle Liquidity Risk? Know Here…

Let's take a look at the top mid cap fund based on their 1-year performance.

Top Mid Cap Funds – 1-Year Returns
Scheme Name 1-year (%)
SBI Small Cap Fund 32.07
HDFC Small Cap Fund 24.99
Axis Midcap Fund 21.25
Reliance Small Cap Fund 19.30
HSBC Small Cap Equity Fund 16.67
Edelweiss Mid Cap Fund 16.60
Taurus Discovery (Midcap) Fund 12.79
L&T Midcap Fund 12.62
Franklin India Smaller Cos Fund 12.05
ICICI Pru Midcap Fund 11.85
Invesco India Midcap Fund 11.57
Aditya Birla SL Small Cap Fund 10.43
Union Small Cap Fund 9.82
Kotak Midcap Scheme 9.82
UTI Mid Cap Fund 9.62
Data as on May 21, 2018. Returns are absolute
(Source: ACE MF, PersonalFN Research)

Now let's find out when mid-cap and small-cap stocks declined over the past four months, which of the mid-cap schemes were able to survive the fall better.

Mid Caps That Stemmed The Fall
Scheme Name 22/Jan/18 To 21/May/18 (%)
Axis Midcap Fund -1.33
HDFC Small Cap Fund -4.27
Taurus Discovery (Midcap) Fund -6.11
DSPBR Midcap Fund -6.33
DHFL Pramerica Midcap Opp Fund -6.68
Motilal Oswal Midcap 30 Fund -7.25
Kotak Midcap Scheme -7.42
ICICI Pru Midcap Fund -7.59
Franklin India Smaller Cos Fund -8.11
Sundaram Mid Cap Fund -8.11
L&T Midcap Fund -8.61
Invesco India Midcap Fund -8.95
Edelweiss Mid Cap Fund -9.15
IDBI Midcap Fund -9.27
Aditya Birla SL Midcap Fund -9.41
Data as on May 21, 2018. Returns are absolute
(Source: ACE MF, PersonalFN Research)

Most of the schemes ranked at the top of the list in the one year period are also among the schemes that were able to stem the losses better when the mid cap and small cap indices tanked. These schemes have been highlighted in the table above. Hence, when picking mid cap funds, you need to keep an eye out for funds that are able to manage the downside risk well.

The above tables represent only one short-term period. You need to analyse how the midcap funds perform on both sides of the market, apart from other qualitative and quantitative parameters.

For additional reading:

5 Ways A Mutual Fund Portfolio Review Can Boost Long Term Wealth

Why You Should Strategically Structure Your Portfolio Now?

If you are planning to invest at this juncture, tread cautiously.

Here are 5 important factors you need to look at before picking a Midcap Fund:

  1. Past Performance

    Do not rely on single period performance of midcap funds. Only if the fund has consistently performed across all market cycles and periods, you could shortlist the midcap fund for investment.

  2. Risk-adjusted Returns

    There is no doubt that midcap funds are risky. However, some funds are capable of managing risk better than other schemes. Hence, you simply should not ignore schemes that generate superior risk adjusted returns, as denoted by the Sharpe Ratio.

  3. Portfolio Construction

    You may want to avoid schemes where the exposure is skewed to the top holdings. This concentration adds risk to already risky midcap funds. You may also want to avoid funds that have an disproportionate exposure to largecap stocks. Consider midcap funds that maintain a balanced allocation.

  4. Fund Manager Experience

    The experience of the fund manager plays a crucial role in the performance of midcap funds. It will be sensible to stay with a fund manager who has extensive experience and a dependable performance track-record.

  5. Fund House Quality

    You can assess the quality of a fund house by exploring how their other equity schemes have performed. If most of the schemes have generated a benchmark-beating performance, it is a sign that the fund house has put in place sound investment and risk management strategies.

Did you know?

As per a study by our research team in the past, as much as 32% of equity mutual funds are WORTHLESS investments. That means over one out of every four mutual funds you put your money in is not able to beat the stock market, namely the BSE-200 index.

At the same time, a handful of funds have potential to routinely beat the market by a wide margin. They perform consistently across several market cycles, and are long-term value creators for your money, unlike the rest.

‘FundSelect’, a credible mutual fund research service with a track record of about 15 years, helps in identifying such funds. FundSelect uses a time-tested methodology that helps beat the as much as 80%!

This shows in our long-term performance track record.

performance track record
Performance as on March 28, 2018; Past performance is no guarantee of future results
(Source: ACEMF, PersonalFN Research)

Every Rs 100 invested across FundSelect recommendations since June 2003 has now grown to Rs 1,668, as against Rs 968 for every simultaneous investment of Rs 100 in S&P BSE 200.

That is an outstanding performance in return, by around 80%!

And the service has been extremely successful in picking up mid-caps as well. See for yourself –

1,544% Absolute Return in 13 Years 4 Months
Absolute Return in 13 Years
Performance calculated using NAVs for period 08-Nov-2004 to 28-Mar-2018; Past performance is no guarantee of future results
(Source: ACEMF, PersonalFN Research)

There have been some mistakes too, that said, we still have a whopping 74 percent success rate! This means seven out of the ten FundSelect recommendations go on to make solid investment gains for the investors.

And there’s more great news!

FundSelect is turning FIFTEEN.

And on this auspicious 15th anniversary of FundSelect, we intend to make it “ultra-special” for you.


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Are These Top Large Cap Mutual Funds Worth Your Investment in 2018?


About the Company including business activity 

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989. 

QIS was promoted by Mr. Ajit Dayal with an objective of providing value-based information / views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

'PersonalFN' is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name for providing information on mutual funds and personal financial planning, financial markets in general, etc and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services. 

Quantum Information Services Private Limited (QIS) is registered as Investment Adviser under SEBI (Investment Adviser) Regulations, 2013 and having Registration No.: INA000000680. In terms of second proviso to Regulation 3 (1) of SEBI (Research Analysts) Regulations, 2014 the Company is not required to obtain Certificate of registration from SEBI.
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There are no outstanding litigations against the Company, it subsidiaries and its Directors. 

and condition on which its offer research report. For the terms and condition for research report click here.
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  1. Money Simplified Services Private Limited;
  2. PersonalFN Insurance Services Private Limited ;
  3. Equitymaster Agora Research Private Limited;
  4. Common Sense Living Private Limited;
  5. Quantum Advisors Private Limited;
  6. Quantum Asset Management Company Private Limited;
  7. HelpYourNGO Private Limited;
  8. HelpYourNGO Foundation;
  9. Natural Streets for Performing Arts Foundation;
  10. Primary Real Estate Advisors Private Limited;
  11. Rahul Goel;
  12. I V Subramaniam.

Disclosure with regard to ownership and material conflicts of interest

  1. Neither QIS, it’s Associates, Research Analyst or his/her relative have any financial interest in the subject Company , except QIS receives fees for providing research to Quantum Equity Fund of Fund (QEFoF) which is Fund of Fund scheme managed by QMF.
  2. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report.
  3. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront /annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm's length and as per prevailing market practices

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General disclosure

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Subject Company means Mutual Fund Schemes

Quantum Information Services Private Limited CIN: U65990MH1989PTC054667 Regd. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021 Corp. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021. Email: Website: Tel.: 022 61361200 Fax.: 022 61361222

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