Best Midcap Funds to Invest in 2020. Find them here…

Midcap companies have the potential to deliver superior returns due to higher earnings growth rate. History suggests that midcaps have the ability to outperform large caps over the long term. But since they are emerging companies, the risk involved is higher; meaning investment in midcaps is not for the faint of heart.

Best midcap fund 2020
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But if you have the appetite for high risk and are looking to create an inflation-beating and wealth generating tool with a long term perspective, consider investing a portion of your portfolio in mid cap funds.

What are Midcap funds?

Midcap funds are equity-oriented mutual funds mandated to invest at least 65% of its assets in equity and equity related instruments of midcap companies. Midcaps are defined as companies ranking 101st to 250th in terms of full market capitalisation.

Mid-cap companies have better access to capital and various resources when compared to small-caps, but fewer opportunities as compared to large-caps. Their management team is also stronger than that of small-caps and they adapt to new trends with better ease. They hold the potential to become the large-caps of tomorrow.

Like small-cap stocks, mid-cap stocks are also highly volatile, although the risk involved is slightly lower and the growth opportunities are better. During bull phases, mid-cap funds tend to outperform their pure large-caps and even their large & mid-cap peers by a significant margin. Conversely, in the bear periods, they also have a tendency to plunge lower.

Mid-cap funds offer you the potential to generate significant wealth. However, do note that the risk is substantially magnified. Invest in a mid-cap fund only if you have high risk appetite, ability to bear short-term pain, and an investment time horizon of 5 years or more.

Graph: Mid cap funds are placed higher on the risk-return spectrum

Graph: Mid cap funds are placed higher on the risk-return spectrum
Note: For illustrative purpose only
(Source: PersonalFN Research)

On the risk-return spectrum, mid-cap funds are placed just a level below small-cap funds. Hence they are high-risk high-return investment proposition.

Table: Top performing Midcap funds based on five year returns

Absolute (%) CAGR (%)
Scheme Name 1 Year 3 Years 5 Years
Kotak Emerging Equity Fund 8.22 12.22 12.40
Axis Midcap Fund 13.03 19.39 11.88
DSP Midcap Fund 8.49 12.03 11.61
L&T Midcap Fund -1.31 10.78 11.48
Invesco India Midcap Fund 3.71 13.29 10.94
Motilal Oswal Midcap 30 Fund 9.72 9.02 10.82
Sahara Midcap Fund 6.76 10.19 10.69
Franklin India Prima Fund 3.33 10.61 10.41
Edelweiss Mid Cap Fund 4.35 11.42 10.22
Tata Mid Cap Growth Fund 6.53 12.22 9.94
S&P BSE Mid-Cap - TRI -3.50 8.45 9.41
Data as on December 20, 2019
(Source: ACE MF)
*Please note, this table only represents the best performing Mid Cap Funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully.Past performance is not an indicator for future returns. The percentage returns shown are only for an indicative purpose. Speak to your investment advisor for further assistance before investing.

Despite going through a rough phase in the past few years, some schemes have managed to deliver superior returns than the benchmark and many peers without compromising much on the risk. Some of the top performing schemes as per PersonalFN that fare well both on quantitative and qualitative parameters are Axis Midcap Fund, DSP Midcap Fund and L&T Midcap Fund.

Some of the other top performers are:

But keep in mind that the past performance is not indicative of future returns. Hence, if you invest in top performing schemes of 2019 anticipating that they will be top performers in 2020, you may be disappointed.

Remember do not pick Midcap funds by:

Facets you need to look into to select the best Midcap funds:

Facets you need to look into to select the best Midcap funds
Image by Gerd Altmann from Pixabay 

Quantitative Parameters:

  1. Performance and risk analysis

    Analyse if the fund has shown consistency in performance across various market periods with decent risk-adjusted returns.

    Under this, you need to rank the fund based on quantitative parameters like rolling returns across short-term and long-term periods, such as a 1-year, 3-year, and 5-year timeframe, and on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.

  2. Performance across market cycles

    You need to ensure that the fund has the ability to perform consistently well across multiple market cycles. Therefore, compare the performance of all the available mid-cap funds vis-a-vis their benchmark index as well as category peers across bull phases and bear market phases.

    A fund that performs well on both sides of the market should rank higher on the list.

Qualitative Parameters

  1. Portfolio Quality

    Adequate Diversification - The scheme should not hold a highly concentrated portfolio. It should have a well-diversified portfolio and the exposure to the top-10 holdings should be ideally under 50%.

    Low Churn - Engaging in high churning can result in higher cost impacting the overall return of the scheme. Therefore, you also need to consider the portfolio turnover ratio and expenses, and penalise funds involved in high churning, i.e. those funds with a turnover ratio of more than 100%.

  2. Quality of Fund Management

    You must consider the fund manager's experience, workload, and the consistency of the fund house. Therefore, assess the following criteria:

    The fund manager's work experience - He/she should have a decent experience in investment research and fund management, ideally over a decade.

    The number of schemes managed - A fund manager usually manages multiple schemes. Thus, you need to check if the fund manager is burdened with managing a large number of schemes. If he is managing more than five open-ended funds, it should raise a red flag.

    The efficiency of the fund house in managing your money - Research about the fund house's performance across schemes; find out if only a few selected schemes are doing well. A fund house that performs well across the board is an indication of sound investment processes and risk management techniques in place.

    Yes, we know that the above list is a lot for an average investor to look at. It involves a lot of number crunching and much of the data is not easily available in one place. But if you do need to narrow down on the top funds, these factors are of utmost importance.

Watch this short video on selecting mutual fund schemes:

Watch this short video on selecting mutual fund schemes

We, at PersonalFN, select and recommend mutual funds on quantitative and qualitative parameters using our S.M.A.R.T Score Matrix:

  • S - Systems and Processes

  • M - Market Cycle Performance

  • A - Asset Management Style

  • R - Risk-Reward Ratios

  • T - Performance Track Record

The outlook for Midcap funds in 2020:

The current economic environment is not encouraging enough for the growth of smaller sized companies. Due to this, the gains stocks of these companies achieved between 2014 and 2017 have been largely erased since mid-2018.

Graph: Valuations in midcaps look reasonable

Graph: Valuations in midcaps look reasonable
Data as on December 20, 2019

Growth in GDP and improvement credit off take is vital for the midcaps to revive. The government has announced various measures in the recent past to boost economic growth and more measures are expected to be announced in the forthcoming budget. Thus the economy is expected to revive gradually which bodes well for the smaller sized companies. However, they may remain volatile in the short term.

Despite low valuation, not all beaten midcap stocks have high growth prospects which makes stock selection a crucial aspect in mid cap segment. Therefore, invest in funds that lay high emphasis on quality and liquidity rather than chasing higher returns.

Invest in schemes that align with your set investment objective and personalised asset allocation plan. Opt for Systematic Investment Plans (SIPs) mode of investing in mutual funds to lower the volatility and benefit from the power of compounding of wealth. And finally, review your investment at regular intervals to ensure you're on the right track to accomplish your envisioned financial goals.

Editor's Note: 

If you wish to select worthy mutual fund schemes, I recommend you subscribe to PersonalFN's unbiased premium research service, FundSelect.

PersonalFN's mutual fund recommendations tend to beat the market by a significant margin over long time periods. FundSelect has beaten the market by over 70% in a decade.

Each fund recommended under FundSelect goes through our stringent process, where they are tested on both quantitative as well as qualitative parameters.

Every month,PersonalFN's FundSelect service will provide you with insightful and practical guidance on equity mutual funds and debt schemes - the ones to Buy, Hold, or Sell.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

Author: Divya Grover