Which are the best mid-cap mutual funds to invest in 2019?

From an analytical perspective, focus should be on the mid cap funds that give the best returns over a five year period.

Jun 23, 2019 09:06 IST India Infoline News Service

Mutual Funds
Mid caps for a long time were a matter of conjecture and the definition was more optical than real. One of the thumb rules used was to classify all stocks between the market capitalization of $1 billion and $10 billion as mid cap stocks. However, this definition was too static and did not take into account the changing valuations over a period of time.
 
To simplify this idea, SEBI in its mutual fund regulations issued in 2018 gave a more concrete twist to mid cap funds. Stocks were to be ranked on market cap and only the top 100 stocks would be classified as large cap whereas funds from 101 onwards would be ranked as mid cap stocks and then small cap stocks. When a fund was classified as mid cap fund, then the fund had to adhere to the requirement that a majority of its investments must be concentrated in the stocks that met the above definition. This gives better clarity and uniformity in classification.
 
Why mid cap funds
 
A common question is why to opt for mid cap funds? There is a strong justification for the same. Firstly, mid cap stocks have generally outperformed large cap stocks as they operate from a smaller base. Secondly, mid caps tend to be more focused on their core competency. They have neither the bandwidth nor the funds to diversify and that works in their favour. Thirdly, mid cap stocks have been beneficiaries of low crude oil prices and a stable rupee. That was the reason mid caps outperformed the large caps between 2015 and 2018.
 
How to evaluate mid cap funds?
 
Mutual fund evaluation is the same across all classes of equity funds. However, there are 3 things to remember in mid cap funds. Firstly, a short term view does not normally work for mid caps since they need time to grow, scale and perform. Secondly, mid cap funds should be looked at in terms of consistency rather than just the quantum of returns. This makes them more reliable and predictable. Lastly, risk is very important in case of mid cap funds and hence they should be compared based on risk adjusted returns like Sharpe or Treynor.
 
Best performing mid cap funds for 2019
 
One way to look at the right kind of mid cap funds is to rank them on 5 year returns. While one can argue that past performance cannot be indicative, it can surely be suggestive. Check out this list of mid cap funds (regular funds) over a 5 year period.
Fund Name 1-year returns (%) 3-year returns (%) 5-year returns (%)
Kotak Emerging Equity (G) -2.285 11.356 16.955
L&T Mid Cap Fund (G) -7.562 13.501 15.915
Franklin India Prima Fund (G) -2.751 10.118 14.821
DSP Mid Cap Fund (G) -2.109 11.994 14.705
Sundaram Mid Cap (G) -8.104 9.977 14.455
Tata Mid Cap Growth (G) 4.738 11.877 14.439
HDFC Mid Cap Opport (G) -5.695 11.515 14.026
Edelweiss Mid Cap Fund -6.076 11.274 13.961
Motilal Oswal Mid Cap 30 (G) -3.558 6.961 13.877
Invesco India Mid Cap (G) -0.312 11.754 13.867
Data Source: Morningstar
 
There is one thing to understand about these returns. Year 2018 was bad for mid cap stocks for a variety of reasons. Oil and rupee were volatile and the introduction of LTCG tax induced selling in mid cap stocks. Mutual funds were also selling to meet the SEBI reclassification norms. Above all, the additional special margins (ASM) also took its toll on the mid cap stocks.
 
From an analytical perspective, focus should be on the mid cap funds that give the best returns over a five year period. But you must also ensure that the negative returns in the last one year are not too high as that hints at a high risk portfolio. At the end of the day, mid cap fund investing is all about this delicate balance.

Related Story