HDFC Mid-Cap Opportunities Fund: SIP Performance Review

We compare the SIP performance of HDFC Mid-Cap Opportunities Fund with midcap indices like Nifty Midcap 50, NIftyty MIdcap 100, NIfty MIdcp 150 and Nifty Next 50 (all total return indices). Is this fund still any good? Is size a problem?

HDFC Mid-Cap Opportunities Fund was started in June 2007 as a three-year closed-ended fund, “with automatic conversion into an open-ended scheme upon maturity”. In June 2010, when it was about to become open-ended the AUM was only Rs. 1235 Crores.

By June 2014, the AUM swelled to Rs. 5912 Crores as the fund was heavily pushed on the back of a market rally. After just a year, in June 2015, the AUM became Rs. 10,211 crores. Prior to the 2020 crash, the AUM was Rs. 23, 787 Crores in Jan 2020.

Although the midcap segment began falling after Feb 2018, the AUM moved up by 20% up to Jan 2020 bolstered by inflows. In Dec 2019, in an article titled, Should I Exit HDFC Mid-Cap Opportunities Fund, we had pointed out:

Every time the index has given a negative return, the fund has given a lesser negative return

The fund has an excellent downside capture ratio with reasonably strong upside performance. This means it tends to protect investors during turbulent periods such as the present.

This is an update of the trailing lump sum returns (absolute for less than a year and annualised above) comparison.

While it is commendable that the fund has restricted losses compared to the benchmark, trailing SIP returns paint a different picture when additional benchmarks are included. NIfty MIdcap 150 TRI is a significantly tougher benchmark to beat as noted before: Only 6 Midcap Mutual Funds beat Nifty Midcap 150 in the last 5 years

Curiously in late 2017, the fund has significant exposure to smallcap and largecap stocks increasing midcap exposure from March 2018 to comply with SEBI norms. Naturally, this makes all past performance analysis debatable!

Notice that while HDFC Mid-Cap Opportunities Fund has fared quite well wrt NIfty Nifty MIdcap 100, it is not the case wrt Nifty Midcap 150. Such a significant difference when 50 more stocks are added (or removed in the case of Nifty Midcap 50) to the benchmark is an amusing puzzle unrelated to the fund’s performance!

The fund has done well wrt its benchmark but wrt Nifty Next 50 or NIfty Midcap 150. While one can argue it is because of the size it is difficult to justify it. Of course, the fund house could have considered closing or limiting investments to protect existing investors.

Clearly new investors are unlikely to prefer this fund, but when the market picks up (eventually), HDFC Bank might start pushing this fund again to older or existing investors.

The fund has done what it said it would do “try and beat Nifty MIdcap 100 on a risk-adjusted basis)”. So one can argue its large size has not been a problem and that existing investors mature enough to be patient can continue with the fund. However, the fact its asset allocation was quite different a few years ago and that it has fallen more than Nifty Midcap 150 is a cause for concern.

The counterargument is to ditch this fund and choose a Nifty Next 50 index fund. This is definitely the way to go for those who are yet to include a mid cap fund or those who have a small exposure to this or any midcap fund. HDFC Mid-Cap Opportunities Fund has done reasonably well, but is it good enough? Quite debatable.

If you want to switch, switch to Nifty Next 50. Not another mid cap fund, not even Motilal Oswal Nifty Midcap 150 Index Fund!