Study finds midcaps deliver higher returns vs largecaps

India Infoline News Service | Mumbai |

Retail investors can look at increasing their exposure to mid-cap equity via mutual funds and benefit from higher risk-adjusted returns over the long run, says a recent study by Crisil research.

A Crisil study on the returns and volatility of largecap and midcap equities has thrown up an interesting trend. Midcaps not only provided higher returns than largecap equities over longer timeframes, they were also less volatile.

Over a ten-year period ending March 2013, the CNX Midcap Index returned 23% annualised returns as against 19% for the Nifty.

Volatility or risk for the Midcap index was also lower at 25% compared to over 26% for the Nifty.

The same also held true over other time periods like three, five, and seven years.


Press Release follows...

A recent study by CRISIL Research, India’s largest independent and integrated research house, on the returns and volatility of large-cap and mid-cap equities revealed an interesting trend: mid-cap equities not only provided higher returns than large-cap equities over longer time frames, but were also less volatile. The study was
conducted using representative category indices and also extended to mutual funds.

According to Sandeep Sabharwal, Senior Director, Capital Markets, CRISIL Research, “The CNX Midcap Index returned 23% annualised returns over the 10-year period ending March 2013, while the CNX NiftyIndex returned 19%. Volatility (risk) measured by standard deviation for the CNX Midcap Index was also lower at 25% compared to over 26% for the CNX Nifty Index. Even over other periods of analysis, viz., three, five and seven years, the mid-cap index was less volatile while it outperformed the CNX Nifty Index over a five year time-frame.”

Mutual funds, too, displayed similar traits; small and mid-cap equity funds were less volatile than large-cap funds across three, five and seven-year time frames. The former also generated higher returns over multiple periods. Another observation was that while the small and mid-cap category outperformed, not all individual funds gave higher returns. The difference in returns between the best and worst-performing fund varied from 7% in the 10-year period to 19% in the three-year period, thus reiterating the need for investors to make wellresearched investment decisions. Mutual fund research that blends analysis of performance and portfolio attributes, by independent agencies, can aid informed decision-making.

According to Mukesh Agarwal, President, CRISIL Research, “The study also evaluated the reasons behind this trend. Firstly, the CNX Midcap Index is more diversified vis-à-vis the CNX Nifty Index at both sector and stock levels. While the CNX Midcap Index has exposure to 29 industries, the CNX Nifty Index constitutes 17 industries. In terms of concentration, there are only four industries with more than 5% exposure in the mid-cap index compared to nine for the CNX Nifty Index. Greater diversification and lower concentration help lower the risk for the CNX Midcap Index. Secondly, the CNX Midcap Index has a 23% allocation to defensive sectors (which are less volatile) such as consumer staples and pharmaceuticals, while the CNX Nifty Index has 10% allocation to these sectors.”

Thus, contrary to general perception, mid-cap indices and funds have shown lower volatility and higher returns vis-à-vis large cap indices and funds. Hence, retail investors can look at increasing their exposure to mid-cap equity via mutual funds and benefit from higher risk-adjusted returns over the long run. Mutual funds not only offer a diversified portfolio, but also professional fund management based on research which adapts to changing market scenarios. However, it is important for investors to make well-researched investment decisions while choosing funds. Mutual fund rankings by independent research providers such as CRISIL can aid investors in identifying consistent winners.
 

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