Best Midcap Funds to Invest in 2021

Jan 13, 2021

The equity market's rollercoaster ride from highs to multi-year lows and the escalation to all-time highs within a gap of few months has concluded with midcap stocks emerging as one of the winners. You may recall that the midcap segment went through a rough patch between 2018, 2019, and early 2020s. It had battled several headwinds such as, weak economic growth, the liquidity crisis in NBFCs, and global pandemic lockdowns.

The good news is that economic activities are geared to strengthen in 2021, thanks to the dual vaccine advantage--the economic vaccine (stimulus) and the COVID-19 medical vaccine set to be accessible soon. And because midcap stocks have a positive correlation with the economic growth, conditions may keep getting better for midcap funds.

Furthermore, historical performance has proven time and again that investing in mid cap funds over the long term is fruitful. So if you are willing to take some risk in anticipation of better returns consider investing in worthy midcap funds.

What are Midcap Funds?

Midcap funds are equity-oriented mutual funds mandated to invest at least 65% of its assets in equity and equity related instruments of midcap companies, which are ranked from 101st to 250th in terms of full market capitalisation.

Midcap companies have the potential to become the largecaps of tomorrow, which gives midcap funds a higher upside potential and the ability to create significant wealth for its investors. These funds tend to outperform largecap funds during bull market phases.

Graph: Placement of mid cap funds on risk-return spectrum

However, Midcap funds are not as resilient during bear phases and may plunge lower than largecap funds. Keep in mind that midcap companies have a limited scale of operation compared to their largecap peers, lower customer outreach, and limited access to various resources. These factors make them vulnerable to risk during gloomy market conditions.

BREAKING: Full Details of the #1 Investment of the Decade...

This positions midcap funds as a high risk - high return investment avenue. On the risk-return spectrum, midcap funds are just below smallcap funds and thematic/sectoral funds. A midcap fund can form a part of your core portfolio as long as you have a high risk appetite, ability to bear short-term volatility, and an investment time horizon of at least 5-7 years.

Table: Midcap funds manage to outperform the benchmark index

*Please note, this table only represents the best performing Midcap Funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully.Past performance is not an indicator for future returns. The percentage returns shown are only for an indicative purpose. Speak to your investment advisor for further assistance before investing.

Overall, the long term returns of funds in the midcap category are encouraging. Most midcap funds have performed remarkably well in the last one year. This has helped improve the long-term performance of the respective funds. However, it is vital to look beyond returns when you invest in midcap funds and select funds that engage in astute stock picking and prudent risk management.

Top midcap funds to invest in 2021

Based on our analysis and research at PersonalFN, Axis Midcap Fund, DSP Midcap Fund, and Invesco India Midap Fund are currently the best schemes in the midcap fund segment. These funds have rewarded investors well for the risk by avoiding momentum bets and focusing on fundamentally sound high-growth potential stocks in the midcap domain.

Some other decent performers in the category are:

• Edelweiss Midcap Fund
• Kotak Emerging Equity Fund
• HDFC Midcap Opportunities Fund
• L&T Midcap Fund

Remember do not pick midcap funds by:

• Giving importance to the short-term market outlook
• Ignoring your personalised asset allocation
• Depending extensively on the past track-record of a scheme
• Relying blindly on star-ratings
• Disregarding qualitative aspects associated with mutual fund selection
• Relying on the advice given by friends and relatives unqualified to give you advice on mutual funds

Do note that a top performing scheme or category of the past year may not be the top performer in the following year. The important factor while selecting any scheme is to evaluate its performance based on quantitative and qualitative parameters.

Here's how you should select a midcap fund...

Quantitative Parameters:

Analyse if the fund has shown consistency in performance across various market periods (bull and bear market phases) compared to the benchmark and category peers. While all funds may perform well during the bull phase, an important parameter while selecting a midcap fund is to determine its ability to manage the downside risk during tough market conditions.

Then determine whether the fund has rewarded its investors well for the risk they have taken using risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.

Give preference to those funds that stand strong on risk-reward parameters while short listing funds for your portfolio.

Qualitative Parameters

Qualitative parameters are often overlooked though they are a vital aspect in the selection process. It involves determining the quality of the portfolio and the efficiency of fund manager/house.

The fund house should have a significant performance record and must follow robust investment processes with adequate risk management systems in place.

And because the fund's performance is directly dependent on the ability of its fund manager, check the qualification and experience of the fund manager and the track record of the other schemes they manage.

Look at the fund's portfolio for how well diversified it is across stocks/sectors. Remember that a concentrated portfolio can expose you, the investor/s, to higher risk. Ensure that the scheme includes highly liquid, quality names of organisations in the midcap space to help it sail through adverse market conditions.

Moreover, keep a tab on the churning rate of the securities in the portfolio because a high churning rate can make the portfolio prone to volatility and negatively impact the overall returns of the scheme. Analyse, the portfolio turnover ratio and expense ratio to assess how efficiently the fund controls the churning and limits the expenses.

Yes, we know that the above list is a lot for an average investor to look at. It involves number crunching and much of the data is not easily available in one place. But if you do need to narrow down on the top funds, these factors are of utmost importance.

Watch this short video on selecting mutual fund schemes:

At PersonalFN, we select and recommend mutual funds based on quantitative and qualitative parameters using our S.M.A.R.T Score Matrix:

• S - Systems and Processes
• M - Market Cycle Performance
• A - Asset Management Style
• R - Risk-Reward Ratios
• T - Performance Track Record

The outlook for midcap funds in 2021:

Midcap funds bet on defensive sectors such IT and Pharma have proved to be rewarding in 2020. The midcap segment benefitted from higher participation from retail investors as valuation in frontline stocks soared to all-time highs.

Going forward, if the economic revival continues to be strong, midcap funds could once again outperform largecap peers. Here are some of the factors that bode well for midcap funds:

• Better corporate earnings on improving demand
• Emphasis on Atmanirbhar Bharat as India along with other countries looks to shift manufacturing base away from China.
• Government measures to boost growth through production linked incentives
• Liquidity boost from RBI may continue in the near term, providing easy access to capital

However, beware of any short-term hurdles that can affect the performance of the funds. Here are some of the potential risks that the economy may face:

• Falling urban incomes
• High fiscal deficit
• Concerns regarding financial health of banks
• Geopolitical risks

Therefore invest with a long-term goal horizon, preferably though the SIP mode to mitigate the impact of volatility.

Though midcap funds may outshine largecap funds, do not increase your weightage in the category without evaluating your portfolio and financial needs. Stick to your personalised asset allocation plan based on your financial goals, risk appetite, and investment horizon and avoid taking undue risk.

PS: PersonalFN has completed 20 years of unbiased research service and we want to celebrate it with our loyal readers and subscribers like yourself. Get PersonalFN's premium mutual fund research service 'FundSelect Plus' in this exclusive anniversary offer. As a FundSelect Plus subscriber, you will get access to 7 ready-to-invest premium mutual fund solutions with high performance potential. Subscribe now!

Author: Divya Grover

This article first appeared on PersonalFN here.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.