debt markets | Mid-cap funds look good, but don’t invest in one go

Investors looking to invest in mid-cap mutual fund schemes could look at staggering their investments over the next few months, said investment advisors. After outperforming blue-chips so far in 2021, valuations of mid-cap stocks are not cheap but fund managers said there might be room for more upsides. Mid-cap products run by Axis Mutual, Motilal Oswal, Union, and Invesco are the top picks of advisors.

The Nifty Midcap 150 has returned 88% as against 60% by the benchmark Nifty. But the midcap index is still an underperformer from January 2018—when the index hit a peak before correcting. From January 2018 to April 2021, Nifty Midcap 150 has returned 6.9% on an annualised basis compared to 10.7% gains in the Nifty. Mutual funds believe the underperformance over the past three years is a reason for this category to revive.

“With correction in midcap space in the last couple of years compared to large-cap space, the frothiness in midcap valuations appears to have subsided,” says Chintan Haria, Head Products & Strategy, ICICI Prudential Mutual Fund.

Haria said the Price to Earnings Ratio—a popular valuations measure—of the Nifty Midcap 100 was 45 times in January 2018. Then, Nifty was trading 24 times. Now, this gap has converged and both Nifty50 and Midcap 100 indices are trading at similar valuations of around 33 times.

Scheme3-year return (%) 5-year return (%)PGIM India Midcap19.5520.02Axis Midcap17.8119.84Kotak Emerging 14.1918.57Invesco Midcap14.2517.96 Edelweiss Midcap11.6818.27

Returns annualised
Source: Value Research

Though valuations of mid-caps are not cheap, fund managers are finding comfort in them compared to many large-caps. Low interest rates create a conducive environment for midcaps, as the cost of capital – a key driver of profitability for high growth mid-sized companies comes down.

“There are concerns that economic recovery will result in uncertainty pertaining to sustainability of high growth and earnings and cause volatility. Investors could use this opportunity to accumulate midcap funds in a staggered manner,” says Rohit Shah, Founder, Getting You Rich. Shah recommends Axis Midcap and Motilal Oswal Nifty 150 Midcap Index Fund.

Over the last 5 years, out of the top 500 stocks listed, the midcap segment has contributed a significant number of multi-baggers. 11 mid-cap companies have given 5-10 times returns as compared to seven in the large-cap space. Five companies have returned more than 10 times as compared to two large caps.

“There are many midcap companies which are leaders in their respective business. Amidst the pandemic many listed midcaps will grab market share from unorganised players in the SME segment,” says Viral Bhatt, Founder, Money Mantra. He recommends Union Midcap and Invesco Midcap Fund.

Financial planners however warn investors against going overboard while allocating to midcaps and invest with a five-year time frame.

( Originally published on May 10, 2021 )

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