How many mid cap funds outperformed Nifty Midcap 150 Quality 50 Index?

Published: April 12, 2022 at 6:00 am

Last Updated on September 5, 2022 at 4:33 pm

In an update to our previous reports, we find out how actively managed mid cap funds fared against Nifty Midcap 150 Total Returns Index (TRI) and factor-based index Nifty Midcap 150 Quality 50 TRI.

From April 2022, our monthly equity mutual fund screener will include benchmarking against the Quality 50 mid cap index and NIfty 100 Low Volatility 30 index as we now have index fund options for both. See UTI Nifty Midcap 150 Quality 50 Index Fund Review and UTI S&P BSE Low Volatility Index Fund Review.

The Nifty Midcap 150 Quality 50 Index has 50 stocks with higher profitability, lower leverage and more stable earnings from the Nifty Midcap 150 universe. According to the methodology document, equal weight is given to return on equity (last fiscal year), debt to equity (last fiscal year) and last five year EPS growth variability. The debt to equity factor is not used for financial services stocks.

Rolling return outperformance consistency: the fund returns are compared with category benchmark returns over every possible 3Y,4Y, 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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Active Midcap Mutual Funds vs Nifty Midcap 150 TRI

Many investors believed that active midcap fund managers will be able to easily beat a market capitalization based mid cap index. Sadly, as we have established before, this is not true: Myth Busted: Active mid cap mutual fund managers can easily beat the index.
As of April 7th 2022, there are 23 mid cap funds that are older than five years, Out of these, only six of them have a rolling return performance consistently of 70% or more. And one of these six is new having only about 91 5Y return data points. So it is effectively 5 out of 23 or about 22%. Which is a terrible turnout for all the high fees they charge.
If we expect 70% rolling returns outperformance consistency of 70% or more over 5 years and 4 years and 3 years, we are left with only three funds!
  • Over 5 years alone, 5 out of 23 funds qualify.
  • Over 4 years alone, 5 out of 24 funds qualify (excluding the new fund mentioned above)
  • Over 3 years alone, 5 out of 24 funds qualify (excluding the new fund mentioned above)

This is an extraordinarily poor showing! Detailed results are available here: Equity Mutual Fund Screener April 2022: Shortlist consistent performers.

Active Midcap Mutual Funds vs Nifty Midcap 150 Quality 50 TRI

We have already shown that the quality index has outperformed the Midcap 150 index with reasonable consistency. So things are only going to get worse.

  • Over 5 years alone, 1 out of 23 funds qualify and that is young! So effectively none.
  • Over 4 years alone, 2 out of 24 funds qualify and both of them are young (one more than the other)
  • Over 3 years alone, 1 out of 24 funds qualifies and that is a young fund!
  • over 5 years and 4 years and 3 years, none qualify.

When returns are so bad, there is little point in discussing downside protection like we usually do. See for example: Mirae Asset Hybrid Equity Fund: Performance Report.

Do these results represent the superiority of the quality factor? No. They represent the inferiority of active human management when compared to a set of fixed (and arbitrary!) rules. Read more: UTI Nifty Midcap 150 Quality 50 Index Fund Review.

Does this mean, I can switch from an active mid cap fund to a mid cap index fund? Yes, but some caution is necessary. Index funds beyond the top 100 stocks are plagued by huge tracking errors.

So then what?!

What about my existing active mid cap fund investments? You will have to take a call on this on a case by case basis. Are you satisfied with the performance wrt the Nifty Midcap 150? Should I compare my fund with the quality mid cap index? If the returns are prior, do I have faith in the fund management? If you can find convincing answers for these, continue investing; else, quit. See, for example, DSP Midcap Fund: Performance Report.

In the next article, we shall discuss the performance of active small cap mutual funds and why one should use a mid cap index to benchmark them! See: Why investing in small cap mutual funds does not make sense!

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