Midcap Marvels: Analyzing the Top 5 Mutual Funds for Growth
A Comparative Analysis of Top 5 Midcap Mutual Funds
In the vast landscape of mutual funds, midcap funds stand out as an enticing option for investors seeking a balance between growth potential and risk management. These funds typically invest in companies with market capitalizations between large-cap and small-cap stocks, offering a sweet spot for investors looking to capitalize on the growth potential of smaller companies while mitigating some of the risks associated with them.
In this blog post, we'll delve into the world of midcap mutual funds, exploring what makes them unique and comparing the top 5 funds in this category. By examining various parameters such as performance, expense ratios, risk factors, and portfolio composition, we aim to provide you with valuable insights to help you make informed investment decisions.
Recently, I embarked on an in-depth analysis of a particular midcap mutual fund that had piqued my interest - Kotak Emerging Equity Fund. This deep dive not only provided valuable insights into the fund itself but also inspired me to expand my research to include a comparative analysis of the top midcap mutual funds in the market.
Now, before we dive into the comparison, let's take a moment to understand what midcap mutual funds are and why they hold a special place in investors' portfolios.
Strategy: Characterized by their potential for growth and innovation.
Market Cap: Invests in stocks with market caps above ₹5,000 cr but less than ₹20,000 cr
Returns: Often in the growth phase of their lifecycle, with the potential to generate higher returns compared to larger, more established companies.
Risk: Balance between the stability of large-cap stocks and the high growth potential (and risk) of small-cap stocks. They are moderately risky.
Diversification: Investors can achieve greater diversification, spreading their risk across a broader range of companies and industries.
Volatility : Experience moderate volatility compared to the high volatility of small-cap funds and the lower volatility of large-cap funds.
Liquidity: Good liquidity, though not as high as large-cap funds.
Now that we have a basic understanding of midcap mutual funds, let's compare the top 5 funds in this category vis-a-vis the new fund I looked at:
Motilal Oswal Midcap Fund (MOMF)
Quant Midcap Fund (QMCF)
HDFC Mid-Cap Opportunities Fund (HDFC MCOF)
Mahindra Manulife Mid Cap Fund (MMMCF)
Nippon India Growth Fund (NIGF)
When comparing mid cap mutual funds, several key factors can help investors assess their suitability and potential performance. Here are the major comparison factors
Performance : Historical Returns & Benchmark Comparison
Fund Details : Charges and Turnover Ratio
Portfolio Composition : Holdings , Allocation etc
Risk Measures : Alpha, Beta etc.
There are multiple others as well like Fund Manager’s Track Record, Liquidity, AUM but considering we are comparing here the top 5 it won’t have a major impact on our decisions.
I looked for consistent long-term performance (>3 year). I also compared the funds with benchmark indices and existing ETFs.
The two funds Motilal Oswal Midcap Fund & Quant MidCap Fund have been the table toppers be it lumpsum investments or SIP. Both of them beat the benchmark index and the ETFs by >10% in the last 3 year period. For 5 year period, QMF beats 150 midcap benchmark by ~8% and beats Midcap100 ETF by ~10% . More or less, Similar performance through SIP returns.
HDFC MidCap Opportunities comes a close 3rd and has been a very consistent performer across all these years.
Expense Ratios: Expense ratios represent the annual fees charged by mutual funds to cover operating expenses. ETFs have a very low expense ratio which makes then a very attractive over longer periods.
Portfolio Turnover Ratio: A high turnover ratio might suggest a focus on market timing, chasing momentum and short-term opportunities, while a low turnover ratio might indicate a strategy based on long-term value investing. Quant MCF has a very high turnover ratio but their philosophy is momentum based.
Ranks from two of the Websites.
The composition of a mutual fund's portfolio can provide valuable insights into its investment strategy and risk profile. Examining factors such as sector allocation, diversification, and stock selection criteria can help assess whether a fund aligns with their investment objectives and risk tolerance.
→ The total number of individual stocks held, indicates the level of diversification. A very high number for all except the MoMF and Quant MCF.
→ The percentage of 5/10 largest holdings which can significantly influence the fund's performance. Both MOMF & QMCF are heavliy invested in their top 5/10 stocks and performance of these stocks would mostly drive the respective fund’s performance.
→ Top 3 sectors - reflecting the fund's sectoral focus and risk exposure. All of the funds have ~45% in the top 3 sectors.
→ The P/B ratio of the fund's portfolio, indicates the valuation levels conisdering their book value. PB of MOMF is very high at 5.6 while others are around 3.
→The P/E ratio of the fund’s portfolio, showing the average valuation of the fund’s stocks based on their earnings. PE of MOMF is again very high at 43.5 while HDFC MCOF & Mahindra Manulife MCF have the lowest PE (~20) across all top funds.
While midcap funds offer the potential for higher returns, they also come with increased volatility and risk compared to large-cap funds. Understanding the risk factors associated with each fund, such as sector concentration, market sensitivity, and liquidity risk, is crucial for managing investment risk effectively.
Let’s learn few risk measures and the we will compare it across the funds.
Sharpe Ratio:
Measures the risk-adjusted return of a mutual fund, indicating how much excess return is earned for each unit of risk taken.
Alpha:
measures excess return relative to a benchmark, indicating a manager's skill at generating returns beyond market performance.
Beta:
indicates a fund's sensitivity to market changes. A beta over 1 means it's more volatile than the market, while below 1 implies less volatility.
Sortino Ratio:
Similar to the Sharpe Ratio but only considers downside risk (negative returns), providing a measure of risk-adjusted return that focuses on negative returns.
Standard Deviation:
measures the volatility of a fund's returns. The higher the value, the riskier the investment.
Not only the returns for MOMF are the best across periods but it performs best even across all the risk indicators. QuantMCF comes close except the the Beta but it is quite expected as the Quant MCF is mostly about chasing momentum.
I have also attached the google sheet so that in case one would like to add any other fund for comparison, can save a copy and edit it. Also, the numbers change quite frequently hence it might be a little different as the numbers have been added over a period of 15 days.
Mid Cap Mutual Fund Detailed Analysis
Conclusion
Midcap mutual funds offer investors an attractive opportunity to capitalize on the growth potential of mid-sized companies while diversifying their portfolios and managing risk effectively.
Investing in mid cap mutual funds can be an effective way to balance growth potential and risk. Based on the above research, you can conisder few of the funds. One can also split up money across funds and invest through different routes.
Thanks for reading!
If you like found this article informative & useful, do forward it to your whatsapp groups and encourage them to subscribe. Thanks for your support!
Disclaimer: Remember, investing in mutual funds involves risks, and past performance is not indicative of future results. It's essential to conduct thorough research, consider your investment goals and risk tolerance, and consult with a financial advisor before making any investment decisions. Please note that I am not a registered financial advisor. The following information is based on personal research and is intended for informational purposes only. It is important to conduct your own research or consult with a professional financial advisor before making any investment decisions.
Disclaimer: My positions.
Other Articles
Selective Spectrum - Here I share the best podcasts/videos/articles across Business, General Knowledge, Health, Productivity and many more ! Dont Miss Out !