When a comparison is made to underperforming indices such as CNX 500 or BSE Mid-cap, the category returns of mid-cap funds may look reasonable.

But when compared with the Nifty or the category average returns of large-cap funds, the performance is not convincing enough.

While over one-, two- and three-year time-frames, the mid-cap funds as a category have matched or have mildly outperformed the Nifty and the large-cap funds, over longer periods of four and five years they have lagged.

For instance, the category return of mid-cap funds over five-years is 11 per cent (compounded annually), in which period the large-caps returned 12.5 per cent and the Nifty 12.9 per cent.

So, what came in the way of mid-cap funds doing well? For one, though they chose the right sectors, that the stocks within sectors tended to diverge, impacted their performance.

For example, even though many funds chose IT and pharma sectors, stock selection mattered.

During the last one year, while the large-cap stocks in these two sectors have delivered spectacular returns, the mid-cap names have tended to trail or remain stagnant.

So, even though large-cap funds took lower risks, thanks to investing in robust, well-known companies, they delivered better returns.

In other words, for a higher risk, mid-cap funds failed to deliver a premium over their large-cap counterparts.

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