Long-term investors benefit hugely in midcaps. Overall, midcaps tend to go through high volatility but, at the end of the day who has remained a long-term investor has amassed considerable wealth.
Large cap funds or mid cap funds? Which fund is ideal for me? This question often comes across most of the investors. If you have been an investor for the last 10-15 years, you will vouch that midcaps have outperformed large caps. However, if you are a recent investor in the last 2-3 months, you must be devastated seeing the performance of the midcap funds.
During corrections, markets tend to punish midcap funds than large cap funds. Typically, one tends to invest purely by checking the past performance of funds while sorting the returns from 'Best to Worst' and make an investment decision. Though past performance is important to understand the fund manager's performance, it no way can determine the future performance. Therefore, the decision of choosing a particular fund to invest in is not as simple as one feels. It involves discipline, patience, understanding risk, the period of holding besides various other attributes of an investor.
Midcap companies tend to be less researched and therefore there is always a valuation gap present between them, i.e. it is different from its fair value. Often these companies are either undervalued in the bearish market or overvalued in the bullish market. Hence, midcap stocks tend to do better than large cap stocks in bull markets. On the other hand, these stocks are also the hardest hit in deep corrections. Let us take an example of Midcap 100 Index VS Nifty 50 and how they have performed. Let's go back 12 years from now to June 2006, We witnessed an unbelievable run in Midcap index from 3500 to almost 9700 in the span of just 18 months. Who would have thought of that? 200% return in an index after 18 months. Anyone would want to grab that with all their might. During this time, anyone witnessing this type of performance would have joined the rhythm but, who knew that we were heading to the biggest financial crisis. It was time for recession… Jan 2008, we formed a peak of Midcap index at 9700 and then continuously fell to 2900 in the span of only 12 months.
Midcap 100 touched 2900 for the first time on December 27, 2004. That means investors not only lost 70% of their investment at an index in just 365 days but had gone back to 2004 levels. Who would have predicted that? Then came in the recovery period followed by consolidation as the economy started to recover from the recession and all the major indices started to recoup its previous losses which was the start of next BULL RUN. It was May 2014, when the indices had recovered all the previous losses after consolidating for almost five years and now it was time to head north. For investors who would have entered the markets in January of 2008, managed to break even post elections in May of 2014. Similarly, let's look at what SIPs had done during this period.
Scenario 1: We have evaluated 5-7-10 years returns of Midcap 100 VS Nifty as on October 01, 2013 when the markets started moving north prior to the elections. In every duration, Nifty 50 had outperformed Midcap 100 index.
Scenario 2: We have evaluated 5-7-10-15 years returns of Midcap 100 VS Nifty as on latest February 09, 2018. You will notice that the Midcap Index has outperformed Nifty during every duration consistently and by handsome margins.
Basically, long-term investors benefit hugely in Midcaps. Overall, Midcaps tend to go through high volatility but, at the end of the day who has remained a long-term investor has amassed considerable wealth. The Midcap index has given an amazing 400% in the last one decade at the same time the large cap (Nifty 50) has given a return of 350%, so we are not really that far in terms of return, but in terms of volatility, the large cap has had a standard deviation of almost half that of the Midcap index. So this is the question, Is the risk worth that extra 50%? We would suggest, go back to your drawing board, re-assess your risk profile and decide accordingly.
An ideal portfolio should have 20-35% of their equity investments into Midcap funds, depending on the investor’s attributes, i.e. investors age, investment objective, risk appetite, etc. This will be subjective in nature and one must not try to copy others in this process as every investor has different goals and risk appetites.
Happy Investing!(The writer is managing director of investonline.in)