Last Updated on August 22, 2022 at 11:11 pm
The March 2020 crash has been a turning point for midcap stocks. The stock universe represented by Nifty Midcap 150 was on the downtrend from early 2018 has zoomed past Nifty 50 and Nifty Next 50 indices. Long-term Nifty Midcap 150 TRI returns (including dividends) are higher than Nifty Next 50 TRI returns for the first time!
This is the evolution of Nifty Midcap 150, Nifty Next 50 and Nifty 50 total return indices from March 23rd 2020 (bottom of the crash). The midcap index has gained 186% compared to 139% gains for Nifty 50 and 136% for Nifty Next 50.
The trailing returns as of October 8th 2021, are tabulated below. The midcap index has outperformed the other two indices comfortably.
| Tenure | NIFTY 50 – TRI | NIFTY NEXT 50 – TRI | Nifty Midcap 150 – TRI |
| 1 | 53.05 | 58.39 | 82.15 |
| 2 | 28.16 | 29.19 | 44.22 |
| 3 | 21.43 | 20.12 | 28.51 |
| 4 | 17.10 | 12.39 | 17.48 |
| 5 | 16.93 | 14.17 | 18.44 |
| 6 | 15.47 | 15.12 | 18.98 |
| 7 | 13.88 | 15.90 | 19.06 |
| 8 | 16.20 | 19.28 | 24.08 |
| 9 | 14.99 | 17.64 | 20.54 |
| 10 | 15.24 | 17.71 | 20.24 |
For durations above five years, this outperformance wrt Nift Next 50 is for the first time (and therefore a one-off at the time of writing). This can be seen by plotting rolling returns over every possible 5,6,7,8,9 and 10 years from the inception of the Midcap index (April 1st 2005).
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Five-year rolling returns
Nifty Next 50 is currently going through a bad patch when compared to the NIfty, but it is not for the first time, as one can see from above.
We can see how the midcap index has pulled away from Nifty Next 50 since March 2020. This is the first such outperformance in a bull market.
Six-year rolling returns
The current patch of underperformance wrt Nifty 50 is the second such instance – the first before the 2013 bull run.
Seven-year rolling returns
Even over seven years, the Nifty Nifty 50 did not beat the NIfty 50 in the past. One must keep that in mind and not get swayed by the recent outperformance.
The recent midcap outperformance is now clear. The trend will become more prominent over eight, nine and ten-year durations, as seen below.
Eight-year rolling returns
Nine-year rolling returns
Ten-year rolling returns
For the last year or so, long-term Nifty Midcap 150 TRI returns have been higher than Nifty Next 50 TRI.
What do these results mean, and what should investors do? Investors like to see something good and start investing in it. And once they start, they don’t want to be told that they are not investing in the best!
If anything, the above graphs reiterate the adage that everyone knows, but no one takes seriously: past performance is not an indication of future performance.
Now, this cuts both ways: In early 2020, Nifty Next 50 was a superior index compared to Nifty Midcap 150. by late 2021, we know it is not always true.
This does not mean the midcap index will consistently outperform Nifty Next 50! We should expect cyclic behaviour from the two indices – one is on top at one time and another on top another time. So this outperformance could end as abruptly as it began.
Inspite of the recent underperformance wrt Nifty, the long-term risk-reward still favours some exposure to Nifty Next 50 (who knows, that might change too!).
However, as more and more investors and institutions flock to the stock market, the market depth increases and the volatility (and therefore returns) of Nifty Next 50 may come down in future. Also, see: Do not expect double-digit returns from Nifty Next 50 index funds!
If you are investing in a Nifty Next 50 index fund, we recommend continuing it. There is no need for either active or passive midcap fund exposure. See: Myth Busted: Active mid cap mutual fund managers can easily beat the index. And Not all index funds are the same! Beyond top 100 stocks tracking errors are huge!
At the very least, it will take a few more years to judge the efficacy of passive midcap funds. There is no point hanging around until then. Nifty Next 50 gets the job done well (but with higher risk than the Nifty).
One reader said, “I am worried about the stocks in Nifty Next 50. I think they are the reason for the underperformance”. Again this cuts both ways: stocks that graduate from the Midcap 150 move to Nifty Next 50 (momentum), and stocks that fail to make the cut in the Nifty moved down to Nifty Next 50. We have no control over this. If the stocks in a mutual fund bother you, 100% direct equity (stocks) is recommended. Then you have complete control and the chance to own up to your mistakes.
Another reader asks, “I have only one fund – Nifty index. Can I include a midcap index fund instead of the Nifty Next 50?” In our opinion, it is still too early to consider the midcap (or small cap) passive funds as worthy of investing. The tracking errors are too high. If you don’t like the Nifty Next 50 (because of its recent underperformance), stick to a Nifty (or Sensex) fund. You will not miss out on anything.
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