When I was trying to compile a list of mutual fund benchmarks after the SEBI recategorization, something strange caught my eye. Value Research had included the new benchmarks in the NAV growth charts. The Nifty 100 Midcap (N100M) is a popular midcap benchmark and I noticed many funds struggled to beat it over the long term. So here is a performance comparison of Midcap and Smallcap mutual funds vs Nifty 100 Midcap and our favourite Nifty Next 50 (NN50). This study is based on the recently released July 2018 Equity Mutual Fund Performance Screener
As many as 28 funds in the midcap fund segment use the Nifty Midcap 100 TRI (total returns index where dividends are reinvested). The next popular index is the BSE Midcap with only 7 funds. In the smallcap segment, the BSE Smallcap is the most popular index with 21 funds using it. However, many smallcap funds do not have a pure smallcap history. So for this study, we shall consider both as one category – mid & small-cap and use N100M and NN50 (both TRI).
Arguably many midcap funds were not pure midcaps all their life either. This is the main problem in the mid-cap small-cap space. Histories are so short that it is impossible to use them for any analysis. Even in the benchmark space, NSE and BSE have made changes to how indices are computed. Well, it is, what it is.
For this study, 18 midcap funds and 8 smallcap funds were considered. They are the only funds currently holding a star rating (as per VR), meaning (as per VR), they have not changed much after the SEBI rejig. So we will compare their performance with N100M and NN50 over 12Y, 10Y, 7Y and 5Y. To better understand the calculation, I would suggest that you first have a look at this video.
Then you can head over here.
Midcap & Smallcap Funds vs Nifty 100 Midcap and Nifty Next 50
Now let us look at the results.
12-year performance vs Nifty 100 Midcap
Rolling return outperformance consistency: no of times fund has beat index return/(total no of returns)
Downside protection consistency: no of times average fund monthly return was better than index when index monthly returns fell (negative)/(total no of sample points)
Upside protection consistency: no of times average fund monthly return was better than index when index monthly returns were positive/(total no of sample points)
Notice the return outperformance column. Only 3/11 funds have managed to beat NM00 consistently. It is one thing if a fund has 100% downside protection and about 60% return outperformance consistency. I would say that is a good fund. However, 100% downside protection with virtually no return outperformance is bad! Eight out of 11 funds have struggled against the N100Midcap.
Unlike Nifty Next 50, you cannot accuse me of choosing an irrelevant index here! This data alone is enough to justify the title. This is why we badly need a midcap and small-cap fund. There was one from Principal and it was merged into another index as they were no takers. Currently, there are only two midcap etfs:
- ICICI Prudential Midcap Select ETF based on S&P BSE Midcap Select TRI
- Motilal Oswal Midcap 100 Exchange Traded Fund based on NIFTY Midcap 100 TRI
Stay away from both of them as they are not traded often resulting in significant variation from price to NAV. Read more: How ETFs are different from Mutual Funds: A Beginner’s Guide and also
List of Index Mutual Funds and ETFs in India: What to choose and what to avoid You can also watch my talk ion index investing options in India.
Will we get a midcap/smallcap index fund in India?
Not for a while, no. ETFs or index funds are not popular because they do not have enough commissions. Why? because AMCs earn more from active funds. It is easy for the fund houses to sell midcap and small-cap funds (esp closed-ended ones) and gather AUM and increase their profits. I would like to think a good chunk of this aum is “immature”. That is people see huge last 1Y returns and commit money or they assume such funds “will beat” other type of funds “over the long term”.So it is in the interest of the fund houses to not create a mid-small/cap index fund.
Well, that is that. But wait, I have gone ahead of myself. Let us now look at the rest of the results.
12-year performance vs Nifty Next 50
10-year performance vs Nifty 100 Midcap
Things get progressively better as we move to shorter durations. Over 10Y, N100M is still not each to beat for almost half the funds.
10-year performance vs Nifty Next 50
The NN50 has been a pretty hard index to beat. However, going forward the market cap of the NN50 stocks could gradually increase and this might lower returns over the next 15,20Y. Just a guess. Just pointing out not to get carried away by NN50’s past performance.
7-year performance vs Nifty 100 Midcap
Now, that is a lot better! You can easily post funds with good return outperformance and downside outperformance.
7-year performance vs Nifty Next 50
With NN50, the performance is not as strong, but reasonable.
5-year performance vs Nifty 100 Midcap
5-year performance vs Nifty Next 50
Again the NN50 is a bit tougher to beat.
Want to try an exercise over the weekend?
Spot the funds that have a good 5Y and 7Y track record against both N100M and NN50. Look for consistent downside protection and reasonable return outperformance. If you are looking for midcap and smallcap funds (that are open for subscription!) then yourself a nice (short) shopping list! Download the midcap and small-cap funds vs N100M, NN50 screener
Going forward it seems quite probable that at least half the funds in midcap or small cap category will not be able to outperform (in terms of return) a representative category benchmark. This is worrying because we do not have an midcap or smallcap index fund!! There is no alternative! If you like index funds, then stick to ICICI Nifty Next 50 Direct Plan Growth Option. If you like active funds, then look for funds with good downside protection and reasonable return outperformance. Either way, that is all that one can do. sigh!
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