Real Returns. Who says mid-caps are risky?

When making a choice of which funds to invest in, investors look at past fund performance, and accordingly diversify their bets among the top performers.

So, if you are an equity fund investor wanting to invest in large-caps, you might choose the top three funds in terms of performance and hope that history would repeat itself. And while making that choice, it is logical to expect performances of mid-cap funds to be more divergent that that of large-caps. Why? That’s because the mid-cap stocks, by their very nature, are more volatile.

Interestingly though, when we analysed the ‘performance inequality measure’ over three-year fund returns, we found that the performance of mid-cap funds were less divergent than those of multi-caps or large-caps.

Performance inequality measure can be calculated using the Gini coefficient index — a popular economic measure to gauge income inequality. The Gini coefficient ranges from 0 (which represents zero inequality) to 1 (which represents complete inequality). For large-cap and multi-cap equity funds, the Gini coefficients were found to be 0.115 and 0.119 respectively, in three-year period ending August 2, 2016. And for mid-cap funds, the figure was lower at 0.09. In other words, performance of mid-caps was less divergent compared to large-caps or multi-caps.

In the last three years, among multi-cap equity funds, ICICI Pru Value Discovery has been the top performer with annualised return of 36.2 per cent. Almost half of the 48 schemes managed to give higher than 25 per cent annually.

And in the case of large-caps, Birla Sun Life Advantage was the top performer . And about half of the 61 funds gave returns in the range of 18-21 per cent. And among mid-cap funds, HSBC Midcap equity topped the charts with annualised return of 47.7 per cent over the last three years. About 83 per cent of them managed to give returns in excess of 30 per cent annually over the three-year period.

To check if the current performance is not an anomaly, we looked at the performance inequality measure for these three categories of funds — for the period between 2008 and 2010.

During that period, interestingly, the Gini coefficient of mid-caps was found to be higher than that for large-caps or multi-caps. While the Gini index was 0.296 for mid-cap equity funds, it was 0.243 for large-caps and 0.245 for multi-caps.

There are two takeaways for investors from these numbers. One, the Gini coefficient, for all categories of equity funds, has more than halved in the recent three-year period, compared to the three-year period ending 2010, indicating that the performance of fund managers, across categories is showing more convergence in recent times. This makes life easier for investors as far as selecting a fund goes.

Two, lower Gini coefficient for mid-cap funds in recent times means the belief that midcaps are riskier than large or multi-cap funds may not be correct.