Optimal Method for Picking Mid-Size Investment Funds
Investing in midcap funds can be a strategic move for those seeking higher growth potential compared to large-cap funds, while still maintaining lower volatility than small-cap funds. However, the selection process can be complex, as the fund's ranking may change annually.
Key Factors to Consider
Investment Style and Strategy
Midcap funds can be categorized into three main types: Active, Index, and Factor (Smart Beta) funds. Each has its unique approach and benefits.
Active midcap funds rely on detailed fundamental analysis, focusing on business quality, management, financial returns, and growth potential. The aim is to select high-quality mid-cap franchises at attractive valuations to generate long-term outperformance.
Index midcap funds, on the other hand, track a market-cap-weighted midcap index, offering broad diversification and lower costs but with limited potential to outperform the market.
Factor (Smart Beta) midcap funds use rules-based strategies, emphasizing factors like value, quality, low volatility, or growth. They blend passive indexing with targeted active elements to seek better risk-adjusted returns.
Risk and Volatility
Midcap funds generally offer higher growth potential than large caps but with increased risk and volatility. Smaller companies can grow into larger market capitalization over time but are more sensitive to market cycles.
Fund Manager and Track Record
For active funds, the experience and past performance of the fund manager are critical. Look for consistent performance through full economic cycles and a clear, disciplined investment framework.
Cost (Expense Ratio and Fees)
Index funds usually have lower fees than actively managed funds, which may charge higher expenses for their research and portfolio management. Factor funds may have intermediate fees depending on complexity.
Portfolio Concentration and Diversification
Active midcap funds may hold a concentrated portfolio of select high-quality companies, whereas index funds provide broad exposure. Factor funds blend these approaches but often focus on stocks that meet specific criteria rather than full market representation.
Investment Options
Here's a table summarizing the benefits, strategies, and example focus of each fund type:
| Fund Type | Strategy Summary | Benefits | Example Focus | |---------------|-----------------------------------------------------|-------------------------------------|---------------------------------------| | Active Midcap | Bottom-up fundamental selection, focusing on quality, growth, value, and management. Often concentrated portfolios. | Potential to outperform over economic cycles; expert management | BBH Select Series Mid Cap Fund (quality, financial returns, management)[1]; AGF U.S. Small-Mid Cap Fund (earnings growth momentum)[5] | | Index Midcap | Passive tracking of a midcap index (e.g., Nifty Midcap 150 Index). Market-cap weighted. | Lower fees, broad diversification, predictable returns | Nifty Midcap Index Funds; low maintenance, suitable for steady long-term growth[2][3] | | Factor (Smart Beta) Midcap | Rules-based investing emphasizing factors like quality, value, momentum, low volatility; blend of passive and active | Potential for better risk-adjusted returns than broad market; mitigates concentration risk | Multi-factor funds like Nifty Alpha Quality Low Volatility 30; Nifty Quality 30 Index Funds[4] |
In summary, the best strategy for selecting a midcap fund involves considering factors such as the fund's investment philosophy, risk tolerance, fund manager expertise, cost structure, and whether you prefer active management, passive index exposure, or factor-based strategies.
Performance of Midcap Indices
The Nifty Midcap150 Quality 50 index selects the top 50 companies from the universe of 150 companies in the NIFTY Midcap 150 Index based on their Quality score. Although the return offered by this index is lower, the risk in this index is also lower because only quality companies get selected. The 5-year CAGR (Backtested) that the Nifty Midcap150 Quality 50 index has offered is 11.25%.
Investing in Midcap Indices can reduce the risk of selecting a fund that underperforms the benchmark. The returns offered by Midcap Indices are not significantly less, with the average returns being 16.52% for NIFTY Midcap 150 - TRI. The minimum return offered by this index over a 7-year rolling period is 4.65%, while the maximum return is 27.13%.
The NSE has made one strategic Index from the Midcap space - Nifty Midcap150 Quality 50 index.
In active funds, the fund manager tries to give better returns in comparison with the benchmark. 13 out of these 16 funds have given better returns in comparison with the benchmark.
- When considering mutual funds for finance, one must evaluate the different investment styles and strategies of midcap funds, such as Active, Index, and Factor (Smart Beta) funds, as each type offers unique benefits and approaches to investing.
- Analyzing the cost of mutual funds is essential, as index funds tend to have lower fees than actively managed funds, while factor funds may have intermediate fees; this can significantly impact the overall returns in the long term.
