From time to time, investors find midcap stocks and funds very attractive. 2014 to 2017 was a fabulous period for midcap mutual funds, with some mutual funds delivering 20%+ CAGR returns during this period. Investors flocked to these mutual funds investing both in lump sum and through SIP. Investor interest in these funds were so high, that some midcap mutual fund managers were struggling to deploy the fresh inflows in attractive investment opportunities because valuations of many midcap and small cap stocks had sky-rocketed by 2017. As a result, some midcap mutual fund schemes put restrictions on lump sum investments and some suspended subscriptions (both in lump sum and SIP).
Come 2018, the picture is different. Mid and small cap stocks have come under pressure. The Nifty Midcap 100 index is down nearly 13% on a year to date basis, while the Nifty is almost flat (up about 1%). In the last one year, Nifty Midcap 100 index gave just 5.8% return while the Nifty gave 11.2% return. The charts below show the movement of Nifty and Nifty Midcap 100 in the last 12 months.
Source: NSE
Source: NSE
You can see that Nifty Midcap 100 was much more volatile (both on the upside and downside) than Nifty in the last 12 months. Volatility characteristic is one of the primary differences between the large cap segment (represented by Nifty) and midcap segment (represented by Nifty Midcap 100); the small cap segment is even more volatile than the midcap segment.
Investors who understand the risk characteristics of these two market cap segments and have high risk appetites, prefer to have substantial allocations to midcap mutual funds if they have long investment tenures. However, many retail investors get attracted by high returns given by midcap mutual funds in bull markets, without understanding the risks.
The insatiable appetite for midcap mutual funds seen from 2014 to 2018 is not a new phenomenon in our market – we saw similar levels of interest in 2006 and 2007 too. But midcap mutual funds were among the worst hit in the financial crisis of 2008. Midcap stocks (represented by BSE Midcap index) crashed 62% in 2008, while large cap stocks (represented by BSE 100) fell 54%.
Let us now understand the fundamental differences between large cap and midcap segments, so that investors understand the risk factors clearly before investing.
We have discussed the different characteristics of large cap and midcap mutual funds. Midcap mutual funds have the potential of generating higher returns for the investors compared to large cap mutual funds in the long term but they are more volatile and can be illiquid in certain conditions. If you have high risk appetite and are willing to ride out the volatility, no matter how long it takes, midcap mutual funds can be good investment options.
Large cap mutual funds on the other hand provide stability to your portfolio, they are highly liquid irrespective of market conditions and good large cap funds can generate good returns for investors in the long term.
We will now discuss a large cap mutual fund, which has consistently outperformed the benchmark and category returns.
Indiabulls Bluechip Fund has consistently outperformed both the benchmark Nifty and the large cap funds category returns over the last 3 years (please see our chart below).
Source: Advisorkhoj Research
Indiabulls Blue Chip Fund was launched in February 2012. The scheme has Rs 1,022 Crores of Assets under Management (AUM). The expense ratio of the fund is 2.94%. The fund has given 11.33% compounded annual returns since its inception. The fund is managed by Sumit Bhatnagar, an MBA in Investment Management from University of Toronto, Canada and CFA Charter (USA). Prior to joining Indiabulls Mutual Fund he has worked with SEBI. The scheme benchmark is CNX – Nifty.
Regular Advisorkhoj readers know that, Rolling Return is the best measure of a mutual fund’s performance because it is not biased point in time market conditions. The chart below shows the 3 year rolling returns of Indiabulls Bluechip Fund versus the benchmark Nifty since inception.
Source: Advisorkhoj Rolling Returns Calculator
Fund manager, Sumit Bhatnagar, follows a combination of top down and bottom up stock picking strategies. The fund manager is to be conservative in the portfolio construction process. He looks to identify key themes to play by analyzing global macro environment, Indian macros, government policies and other economic factors. Once the key themes are identified, he looks at companies that are near monopolies or oligopolies, having pricing power, strong brands, leaders/challengers in their respective sectors, strong distribution franchise, low leverage, decent growth prospects, decent RoE (Return on Equity) & RoCE (Return on Capital Employed) and high quality management teams and low leverage.
Read how this fund beat the CRISIL AMFI LARGE CAP INDEX
The portfolio is built predominantly around domestic consumption and government spending themes. From a market capitalization perspective, Indiabulls Blue Chip Fund has a mandate to deploy 80% in large caps (basically top 100 companies by markets cap) and upto 20% in mid & small cap space.
The chart below shows the growth of Rs 1 lakh invested in the Indiabulls Blue Chip Fund (Growth Option) over the last 3 years.
Source: Advisorkhoj Research
The chart below shows the returns of Rs 5,000 monthly SIP in Indiabulls Blue Chip Fund (Growth Option) over the last 3 years.
Source: Advisorkhoj Research
Read the complete fund review of Indiabulls Bluechip Fund and why it is one of the top performing large cap equity mutual funds
Conclusion
In this blog post, we discussed the key differences between large cap and midcap mutual fund investing. One it not necessarily superior compared to the other – it depends on your risk appetite. Financial planners usually recommend that, large cap or large cap oriented funds should form the core of your long term investment portfolio and depending on your risk appetite you can also have some allocation to midcap funds to diversify your portfolio and enhance your returns in the long term.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.
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