Many investors mistakenly believe that index funds are only needed in the large-cap space, and that active funds will easily beat indexes in the mid- and small-cap segments. This article breaks this myth by comparing the rolling returns and subsequent results of active midcap mutual funds and the Nifty Midcap 150 TRI.
First, let’s compare the trailing returns as of October 7, 2022. The market crash of March 2020 served as a reset for mid and small caps. The mid-cap index, which has been southbound since early 2018, has rebounded sharply. So how did active mid-cap funds perform?
- Trailing 1 year: Of 26 mid-cap funds, only 13 outperformed the Nifty Mid-Cap 150 TRI
- Last 2 years: Only 9 out of 24 mid-cap funds beat the Nifty Mid cap 150 TRI.
- Last 3 years: 8 out of 23 mid-cap funds outperformed the Nifty Mid cap 150 TRI.
- Last 4 years: 12 out of 22 mid-cap funds outperformed the Nifty Mid cap 150 TRI.
- Last 5 years: 10 out of 21 mid-cap funds outperformed the Nifty Mid cap 150 TRI.
- Last 6 years: Seven of the 20 mid-cap funds outperformed the Nifty Mid-Cap 150 TRI.
- Last 7 years: Six of the 20 mid-cap funds outperformed the Nifty Mid-Cap 150 TRI.
- Last 8 years: Seven of the 20 mid-cap funds outperformed the Nifty Mid-Cap 150 TRI.
- Last 9 years: 10 out of 18 mid-cap funds outperformed the Nifty Mid cap 150 TRI.
Typically, 50% or less than 50% of actively managed mid-cap funds outperform standard category benchmarks. So it’s unfounded to assume that it’s “easy” to beat the index in mid-cap spaces!
For rolling return analysis, see the October 2022 Stock Mutual Fund Screener.
Rolling return out performance consistency: Fund returns are compared to category benchmark returns over all possible 1-, 2-, 3-, 4-, and 5-year periods. The more consistent out performance, the better. Suppose the returns of 876 funds are compared to the returns of 876 benchmarks, and the funds beat the benchmarks 675 times. Consistency score will be 675/876 ~ 77%.
- 3-year rolling return: Only 4 out of 23 funds outperformed the Nifty Midcap 150 TRI by 70% or more over the rolling return period considered.
- 4-year rolling return: Only 3 funds out of 22 funds (same conditions)
- 5-year rolling return: Only 4 funds out of 20 funds (same conditions)
Therefore, this poor performance is not a temporary one. Consistent! In a bull or bear market, active mid-cap fund managers struggle to beat market capitalization-weighted mid-cap indices.
Additionally, active mid-cap mutual funds around the Nifty Next 50 were also poor. This is why we’re no longer including mid-cap funds in our short list of mutual funds for October-December 2022 (PlumbLine)
So what are the alternatives? Of course, we don’t force you to invest outside of Nifty/Sensex. I would suggest not picking mid-cap index funds if you want to! See: Index Fund Tracking Error Screener October 2022. Also see: Not all index funds are the same. Beyond the top 100 stocks, the tracking error is very large.
The Nifty Next 50 recently lagged the Nifty Midcap 150 for the first time, but*it is a good alternative to still active mid-cap funds and mid-cap indices. * For more recent data see: Tata Nifty Midcap 150 Momentum 50 Index Fund Review
Combine Nifty and Nifty Next 50 funds to create a large mid-cap index portfolio. Of course, the Nifty Next 50 can be a frustrating index to buy, but that’s true of any mid-cap index as well.
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