Only 3 midcap mutual funds have beat Nifty Next 50 consistently!

Have actively managed mid cap mutual funds managed to beat the Nifty Next 50?

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Published: February 8, 2020 at 12:26 pm

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Yesterday, we had discussed the pros and cons of Nifty Next 50 Index and what investors should know prior to investing in it. We saw that Nifty Next 50 has a risk and reward almost identical to that of the Nifty Midcap 150 Index. In fact, Nifty Next 50 is a bit more volatile. This results in a natural question: how have actively managed midcap funds fared against the Nifty Next 50? This is a performance report.

Nifty Next 50 is a strange index. Although it is “technically” part of the large cap universe, its volatility betrays just how illiquid our stock market is. This has been explained before Warning! Even “large cap” stocks are not liquid enough! Can you handle this? The key reason it is more volatile than a 150 stock midcap index is because of the number of stocks: 50 (midcap like stocks) vs 150.

First, we shall consider rolling returns. That is, we shall compare every possible 1,2,3,4 and 5 year return periods possible from 1st Jan 2013 (from the inception of direct plans) to Feb 6th 2020. We shall only consider funds that have enough history to generate 1000 or more  1,2 and 3-year rolling return data points.

Some funds which were not mid-cap-like before SEBI categorization rules (eg Quant Midcap) have been removed from consideration. However, it is still possible that beyond 2 years, some funds had less of midcap stocks.

This is the full list of funds considered (all direct plans):

  1. Franklin India Prima Fund
  2. DSP Midcap Fund
  3. L&T Mid Cap Fund
  4. Kotak Emerging Equity Scheme
  5. Invesco India Midcap Fund
  6. HDFC Mid Cap Opportunities Fund
  7. Axis Midcap Fund
  8. BNP Paribas Mid Cap Fund
  9. Tata Mid Cap Growth Fund
  10. SBI Magnum MIDCAP Fund
  11. Sundaram Mid Cap Fund
  12. Taurus Discovery (Midcap) Fund
  13. UTI Mid Cap Fund
  14. Aditya Birla Sun Life Midcap Fund
  15. Reliance Growth Fund
  16. Baroda Mid-cap Fund

Five years: 13/16 funds have outperformed Nifty Next 50 (NN50)with a consistency of 70% or more. For example, Sundaram Midcap had got a better return than NN50 over five years 400 out of 515 times or 78%. Let us call this performance consistency.

Four years: Only 6/16 funds managed 70% or more performance consistency!

Three years: Only 3/16 funds managed 70% or more performance consistency!

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Two years: Only 2/16 funds managed 70% or more performance consistency!

one year: Only 2/16 funds managed 70% or more performance consistency!

These are the three funds that qualified as above over 5,4 and 3 years:

  1. DSP Midcap Fund – Direct Plan
  2. L&T Mid Cap Fund-Direct Plan
  3. Kotak Emerging Equity Scheme Direct Plan

Since it is not possible to predict today which midcap fund will outperform NN50 or NIfty Midcap 150 in the future, active midcap fund selection is pretty much a coin toss. That is, it can go either way.

This data, which is in line with earlier reports – Nifty Next 50: The Benchmark Index That No Mutual Fund Would Touch?! – suggests that a Nifty Next 50 index fund can replace both active and passive funds in the midcap space.

There is one caveat though. In the last 2Y, Nifty Next 50 barely moved up with an annualized return of only 0.7%. During this period, all the 16 funds considered above did better. We also saw this trend here: Only 6 Midcap Mutual Funds beat Nifty Midcap 150 in the last 5 years

During a tough period where the market moves nowhere or predominantly down, it is quite possible for active midcap funds to outperform. A prudent investor who rebalances the portfolio regularly can lock-in such gains.

This is the biggest challenge before index investors. The lack of downside protection can be difficult to handle emotionally. Another option is to choose multicap funds and avoid all other types: large cap, mid cap or nifty next 50.

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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman 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.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

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