Mid-cap, large-cap muddle

Over a five-year period, both have given similar returns. What should a retail investor do?

Investors are constantly told that mid-cap stocks or funds are riskier. They are advised to have only a small exposure, say 10-20 per cent, to them.

But, here are some interesting numbers. Over a five-year period, the mid- and small-cap fund category returned 12.56 per cent annually. In comparison, the average category returns of large-cap schemes stood at 12.79 per cent, the same as those of the Sensex.

However, things have turned out quite differently over the last one year. The category average returns of large-cap schemes have been significantly higher than mid-cap ones. While the average returns from the former clocked at 5.5 per cent, those of mid-cap schemes were only 0.82 per cent, according to data by Value Research, a mutual fund rating agency.

 

Financial planners say this is the first lesson one should learn before investing in mid-cap schemes. That is, while they are likely to give returns over the long term, in bad times, they may perform much worse than large-cap schemes.

“While point-to-point returns may be a good indicator, rolling returns would tell the real story about mid-cap funds,” says Hemant Rustagi, CEO, WiseInvest Advisors. The argument: Three good months for the mid- and small-cap segment can completely change the returns scenario as the stocks are high beta.

Also, making a choice in these categories is much more important than that for a large-cap scheme. “Investors in these schemes have to check portfolios before putting in money. This is unlike large-cap schemes, where the usual suspects are likely to be there,” said a financial planner.

Vicky Mehta, senior research analyst at Morningstar, says these are average returns and the difference between the best performing funds in the each category and the worst performers is huge, making scheme selection very important. While the best performing mid- and small-cap scheme gave returns of 15.53 per cent, the worst performing has returned -18.78 over a one-year period — a difference of 34 per cent.

On the other hand, the difference in the performance of large-cap schemes is limited. While the worst performing fund has returned -2.91 per cent, the best performing one has returned 12.77 per cent, the difference, at 16 per cent, being less than half of that in the case of mid- and small-cap schemes.
 

COMPARATIVE RETURNS (in per cent)
Fund category/name	5-year	3-year	1-year	6-month
Equity large-cap	12.79	10.92	4.62	-7.01
Best-performing fund	19.19	22.62	12.77	-0.57
Worst-performing fund	7.27	1.16	-2.90	-11.67
Equity mid-cap and small-cap	12.56	12.32	0.15	-7.34
Best-performing fund	27.46	27.00	15.53	3.44
Worst-performing fund	-6.82	-20.74	-18.78	-22.29
* Data from Value Research

No wonder then, knowing the portfolio becomes critical. If one considers two large-cap schemes — DSPBR Top 100 Equity and HSBC Equity — there is a lot of similarity among the top stocks. For example, both these schemes hold ITC, HDFC Bank, HDFC, L&T and ONGC in their top 10 holdings. Other large-cap schemes are also likely to hold similar stocks among their top 20-25 holdings, albeit in different proportions.

On the other hand, portfolios of mid- and small-cap funds are likely to be completely different. For example, HDFC Mid-Cap Opportunities and Birla SunLife Mid-Cap’s top 10 holdings have only one common stock — Exide Industries. In fact, it is also a function of when the scheme was launched.

Rustagi feels if you do not want volatility in your portfolio, look at larger exposure to blue-chip funds. But, if you want high growth opportunity and are not risk-averse, mid-cap funds are a good idea.

If you are an investor with age on your side and are just starting off, maybe through the systematic investment plan (SIP), your mutual fund portfolio should have large-cap funds in majority, say, at least 50 per cent. The rest can go into mid-cap, small-cap, and, even sectoral funds. Once you start understanding how mid- and small-cap scrips work, you can gradually start increasing your exposure.