Many investors incorrectly believe that index funds are necessary only in the large cap space and that active funds easily beat the index in the mid cap and small cap segments. In this article, we bust this myth with rolling returns and trailing results comparison of active mid cap mutual funds with Nifty Midcap 150 TRI.
First, let us compare trailing returns as of Oct 7th 2022. The March 2020 market crash acted as a reset for mid cap and small cap stocks. Midcap indices that were south-bound since early 2018 made a sharp recovery. So how have active midcap funds fared?
- Trailing one year: Only 13 out of 26 midcap funds beat the Nifty Mid cap 150 TRI
- Trailing two years: Only 9 out of 24 midcap funds beat the Nifty Mid cap 150 TRI.
- Trailing three years: 8 out of 23 midcap funds beat the Nifty Mid cap 150 TRI.
- Trailing four years: 12 out of 22 midcap funds beat the Nifty Mid cap 150 TRI.
- Trailing five years: 10 out of 21 midcap funds beat the Nifty Mid cap 150 TRI.
- Trailing six years: 7 out of 20 midcap funds beat the Nifty Mid cap 150 TRI.
- Trailing seven years: 6 out of 20 midcap funds beat the Nifty Mid cap 150 TRI.
- Trailing eight years: 7 out of 20 midcap funds beat the Nifty Mid cap 150 TRI.
- Trailing nine years: 10 out of 18 midcap funds beat the Nifty Mid cap 150 TRI.
Typically 50% or less than 50% of the actively managed mid cap funds beat a standard category benchmark. So it is baseless to assume it is “easy” to beat the index in the mid cap space!
We refer to our Equity Mutual Fund Screener Oct 2022 for rolling return analysis.
Rolling return outperformance consistency: the fund returns are compared with category benchmark returns over every possible 1Y, 2Y, 3Y,4Y, and 5Y period. Higher the outperformance consistency, the better. Suppose 876 fund returns were compared with 876 benchmark returns, and the fund has beaten the benchmark 675 times. The consistency score will be 675/876 ~ 77%.
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- Rolling returns over three years: Only 4 out of 23 funds outperformed the Nifty Midcap 150 TRI by 70% or more over the rolling return periods considered.
- Rolling returns over four years: only 3 out of 22 funds (same condition)
- Rolling returns over five years: only 4 out of 20 funds (same condition)
So this underperformance is not a flash in the pan! It is consistent! Bull market or bear market, active mid cap fund managers, have struggled to beat a market capitalization-weighted mid cap index.
In addition, active midcap mutual funds wrt Nifty Next 50 has also been poor: Only four midcap mutual funds have outperformed Nifty Next 50 consistently. This is why we stopped including mid cap funds in our Handpicked List of Mutual Funds Oct-Dec 2022 (PlumbLine)
So what is the alternative? There is, of course, no compulsion to invest outside the Nifty/Sensex! If you wish to, then we recommend not choosing midcap index funds! Their tracking errors and tracking differences are too high, at least at the time of writing. See: Index fund tracking error screener October 2022. Also, see: Not all index funds are the same! Beyond the top 100 stocks tracking errors are huge!
Although the Nifty Next 50 has recently fallen behind the Nifty Midcap 150 for the first time*, it is still a good replacement for active mid cap funds and even a mid cap index. As established earlier, Nifty Next 50 should not be mistaken for a large cap index. * For more recent data, see: Tata Nifty Midcap 150 Momentum 50 Index Fund Review
One can combine Nifty & Nifty Next 50 funds to create large, mid cap index portfolios. Of course, the Nifty Next 50 can be a frustrating index to buy, but that is true of mid cap indices too.
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