HDFC Mid-Cap Opportunities Fund – Performance Review

Published: November 10, 2018 at 10:47 am

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HDFC Mid-Cap Opportunities Fund needs no introduction to most fund investors. This 11+-year-old fund is one of the most consistent performers in the mid-cap category. In spite of its AUM almost doubling in the last couple of years, it has managed to stay afloat comfortably. Will it last? In this detailed performance review, let us find out how the fund has performed, especially in the recent past when its size grew too much, too soon. Btw this fund is part of My Handpicked Mutual Funds September 2018 (PlumbLine)

HDFC Mid-Cap Opportunities Fund: Investment strategy

The fund has a mandate to invest 65% of its assets in mid-cap stocks and has reasonable room to invest the rest in other types of stocks, bonds and even real estate investment trusts. The mid-cap portfolio with a focus on (extract from the key information memorandum – page 11)

  1. reasonable growth prospects
  2.  sound financial strength
  3. sustainable business models
  4. an acceptable valuation that offers a potential for capital appreciation

Yeah, that is vague! The fund is currently benchmarked to Nifty 100 Midcap TRI (I am not sure if this was the benchmark since inception). In what follows, I will use the regular plan for comparison with this benchmark. The performance of the direct plan will be at least 1% more.

Fund vs benchmark since inception

HDFC Mid-Cap Opportunities Fund vs Nifty 100 Midcap NAV growth

That is pretty decent growth, but bear in mind this is valid only for NFO investors. So we need to dig deeper.

Has the fund beaten the benchmark consistently over 5 years in terms of return?

HDFC Mid-Cap Opportunities Fund 5 year rolling return performance

The answer is yes! Notice that the gap between the fund and index has narrowed in the recent past. In this period, the aum increased significantly. It is not possible to tell if the two are related and I will not speculate.

Has the fund beaten the benchmark consistently over 5 years in terms of risk? HDFC Mid-Cap Opportunities Fund 5 year rolling risk (standard deviation) performance

This a rolling standard deviation plot (a measure of volatility, lower the better). The answer is yes, it has had lower volatility than the benchmark. Since HDFC Mid-Cap Opportunities Fund has outperformed in terms of return and risk, the expense paid to the AMC is justified.

Has the fund beaten the benchmark consistently over 10 years in terms of return?

HDFC Mid-Cap Opportunities Fund 10 year rolling return performance

Quite comfortably, although the history is short.

Has the fund beaten the benchmark consistently over 10 years in terms of risk?

HDFC Mid-Cap Opportunities Fund 10 year rolling risk (standard deviation) performance

oh yes, it has! However, this is the past.

How has the fund performed recently when its size almost doubled?

HDFC Mid-Cap Opportunities Fund 2 year rolling return performance

Looking at the two-year return, there is a noticeable slump from May 2016 (direct plan should have a bit better). The last time HDFC Mid-Cap Opportunities Fund has such a slump was during the 2008 crash. Will the fund recover or will investors have to adjust their expectations from the fund going forward? My guess (and it is only a guess), is that they will have lower expectations of outperformance.

How has HDFC Mid-Cap Opportunities Fund fared in the fingerprint analysis?

Using monthly returns of the fund and index, we can construct a performance fingerprint like this. This was created with Fingerprinting: A Visual Tool for Analyzing Mutual Fund Performance This is the performance in the last 2 years.

HDFC Mid-Cap Opportunities Fund fingerprinting analysis 2 years

This again confirms the recent underperformance see above (at least by its own high past standards).

If the study is extended to since the fund started, we get:

HDFC Mid-Cap Opportunities Fund fingerprinting analysis since inception

There have been periods of such underperformance before. Notice also that the fund outperforms when the market is down and tends to underperform when the market is going up. This is fantastic! This means the downside risk of the investor is reduced.

Does the fund have downside protection?

Downside capture refers to how much of the index losses has the fund captured. So less than 100% is good here. Upside capture refers to how much of the index gains has the fund captured. So more than 100% is good here. Both capture ratios are plotted below since inception.

HDFC Mid-Cap Opportunities Fund downside protection

Consistently less than 100% downside capture and the same with upside capture too!! Again proves that return outperformance stems from downside protection primarily. Speaking of which, have a look at this video published yesterday about Low volatility stock investing

HDFC Mid-Cap Opportunities Fund vs Nifty Midcap 150 TRI

This is a slightly broader index and is the one I use for evaluating midcaps in the October 2018 Equity Mutual Fund Performance Screener. Here are the results:

5 years: Fund beat index 195/195 times (100%)  with 100% downside protection

4 years: Fund beat index 402/438 times(92%)  with 100% downside protection

3 years: Fund beat index 452/684 times (66%)   with 100% downside protection

2 years: Fund beat index 602/927 (65%) times  with 100% downside protection

1 years: Fund beat index 729/1176 (62%) times  with 100% downside protection

That is pretty awesome. In all fairness to the fund, it is important to give it at least 3 years to outperform.

Update video version is now available

Summary

If you skipped all the above details and came straight here, good luck!

Existing investors: I think you should reduce expectations from this going forward as its size may be a problem. So far the fund has managed brilliantly but how long can it last? The problem is, that this fund has been so consistent in the past that it can only go down in future. So keep an eye and compare the performance of the fund with its benchmark from the date you started investing in the fund

New investors are likely to be disappointed in this fund if they go by past performance. There can, however, be no dispute that the fund has performed excellently so far.

Invest in this fund only if you have moderate expectations and do not have any other midcap fund in your portfolio.

Check out other funds reviews

Full article: Review: Mirae Asset Hybrid Equity Fund

Full article: ICICI Prudential Balanced Advantage Fund : Performance With Low Volatility

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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9 Comments

  1. Are these performance numbers for returns after fees and expenses or before expenses? Isn’t it more accurate to use the net performance of this MF when comparing with the index or comparing with an index fund that has low expense ratio? Thanks

    1. Please understand that it is NOT possible to calculate returns BEFORE deducting expenses!! NAV is always AFTER accounting for expenses. So you are comparing a fund after expenses with an expenseless index fund which is all the more difficult to beat!!

  2. Dear Sir,

    Is this trend (decline in returns) common for every funds with high AUM? I have been investing in HDFC hybrid equity fund for my retirement since past 1 year. Do you think I need to look out for other funds of same category but with relatively low AUM?

    Thanks in advance for your suggestion.

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