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%.
🔥Secure your future with our Robo-advisory tool trusted by over 3,500 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
Subscribe for money management solutions via email! (Link takes you to our email sign-up form) Join 32,000+ readers in our community.
👉 New Tool Alert! NaviPlan: A Privacy-Focused Multi-asset Tracker and Goal Planner 👈
Active Midcap Mutual Funds vs Nifty Midcap 150 TRI
- 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 we do not recommend using Nifty MIdcap 150 Index funds
- We also do not recommend Axis Nifty Midcap 50 Index fund (link points to our review) as it is an underperformed relative to Midcap 150.
- We do not recommend any ETFs because of liquidity issues and price-NAV deviations. Also, see ETFs vs Index Funds: Stop assuming lower expenses equals higher returns!
So then what?!
- If you are not comfortable with factor-investing and the arbitrary cherry-picked nature of their construction – Data Mining in Index Construction: Why Investors need to be cautious -, then we recommend using Nifty Next 50 as a mid cap option. Naturally, this comes with risks that must be understood. See: Is it time to exit from Nifty Next 50?
- If you are comfortable about taking a chance with the quality factor, then you can consider UTI Nifty Midcap 150 Quality 50 Index Fund. Please be aware that this comes with its own set of risks (curation risk – see, for example: Should I exit Nifty Next 50 because of Paytm, Zomato and Nykaa?), tracking error and higher fee.
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!