The Hindu Business Line : Mid-cap funds do recover, but display divergent performance

The selective recovery in mid-cap stocks has perked up the returns offered by equity funds which have a sizeable allocation to such stocks. One-year returns on the CNX Midcap Index now hover at about 57 per cent, higher than the Nifty’s return of 44 per cent. Reflecting this trend, mid-cap funds, which were lagging far behind their large cap peers until a few months ago, now sport an average return of 51 per cent for the past year.

However, there continues to be significant divergence in performance within the mid-cap space. Funds such as ICICI Pru Emerging STAR, Magnum Midcap, Birla Midcap and Reliance Growth, top performers in the mid-cap category on a one-year basis, generated returns of 60-64 per cent. At the other end of the spectrum, funds such as UTI Midcap, Tata Midcap, Sundaram BNP Paribas Select Midcap registered returns ranging from 27 to 38 per cent and lagged the category on a one-year basis.

StockS, not sectors

Mid-cap fund performance over this period was determined by several factors. One, stock selection mattered much more than a fund’s sector preferences. Though most mid-cap managers loaded up on engineering, capital goods and metal stocks, it was stock choices that determined the actual returns. To illustrate, while the top sector choices for ICICI Pru Emerging STAR, a top performer, were software, media and banking, those for Magnum Midcap were metals, construction and engineering stocks.

Second, as the rally in mid-caps was quite selective, funds which preferred larger mid-cap companies fared better than those which focused on less known mid-cap or small-cap stocks. Strong performance from Benchmark’s Junior Bees, which passively tracks the Junior Nifty and the Principal Junior Cap Fund, support this view.

Despite an overall improvement in the returns of mid-cap funds, selecting the right ones for your portfolio has become a more challenging exercise over the past one year. One significant development in this period has been that mid-cap funds with a good long-term record have seen a slippage in one-year returns. For instance, Sundaram BNP Paribas Select Midcap Fund, a stellar performer until last year, has registered one year returns of 38 per cent and has trailed the category average.

Franklin India Prima Fund, another fund with a good long term record, registered a 45 per cent return on a one year basis, below the category average for mid-cap funds. On the other hand, top performers in the mid-cap category turned out to be funds that haven’t accumulated even a three-year track record. Yet, given the volatility inherent in mid-cap stock selection, a track record across a market cycle is a must for investors seeking consistent returns.

What to do

Under the circumstances, investors looking for mid-cap funds should probably

Add exposure to funds such as Magnum Global, Reliance Growth and Birla Midcap which have a reasonable long term record and have stayed above category averages over the past year.

Reduce exposure to funds with a long-term record such as Franklin India Prima and Sundaram Select Midcap, that have under-performed over the past year.

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