Is it the right time to invest in mid-cap funds?

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Following the second wave of Covid infections, the economy reopened to robust demand across all industries. Even in the midst of the downturn, most midcaps have been able to maintain a clean balance sheet and solid operational cashflows. Finally, the market decline in March 2020 also produced a window of very favourable values for midcaps, resulting in a strong price recovery.

In May 2021, multi-cap funds witnessed the largest net inflow of Rs 1,954 crores, followed by mid-cap funds at Rs 1,368 crores, shows data by Association of Mutual Funds in India (AMFI).

Mid-Cap Fund Scorecard

Out of the net assets of Rs 10.1 lakh crore of equity mutual fund Asset Under Management (AUM), the largest share continues to be accounted by large-cap funds with a share of 18%, followed by recently created flexi-fund category with a share of 16%; equity linked saving scheme (ELSS) and mid-cap fund with a share of 12% each.

That said, equity midcaps have done pretty well in the last 6 months and over the past 1-year.  As per the value research data under equity oriented category, the mid-cap funds have given returns of 73.73% (Absolute return) for 1 year and 15.02% (Annualised return) and 15.56% (Annualised return) over 3 and 5 years as of June 21, 2021.

Is it a right time for investors to Invest?

Mid-caps are those companies, which have the ability to turn into large-cap firms in the long run. Hence, the scope and potential for returns can be strong. The outlook for the near term is more normalised returns, but investors who are willing to wait it out over the next 4 to 6 years will be handsomely rewarded.

“Investor’s must keep in their mind that midcaps could go through bouts of volatility. One should have a longer time perspective of around 5 years and can invest through systematic investment plans. During bouts of volatility, one can use that as an opportunity to put in lumpsum amounts. Wealth is made over the long term, and hence staying invested in a good fund is necessary,” said Aniruddha Naha, Senior Fund Manager – Equity PGIM India Mutual Fund.

Given the sharp recovery and rally in midcap stocks, one needs to necessarily think of what is the market missing or what could go wrong. Inflation and interest rates have been favorable to equity markets over the last 3 years. However, the experts remain cautious as the market is yet to discount the high inflation impact on the midcap stocks.

“Inflation has started moving up and the recent inflation numbers don’t give much comfort. In case Inflation becomes structural and impacts growth, that could spook the equity growth story across equity markets. The market is also discounting, the availability of vaccines in the next quarter, and a major portion of the population getting vaccinated. Also, if there is a delay in procurement of vaccines, the earnings recovery story could get delayed,” warned Naha.

That said going forward midcaps have definitely run-up in the near term, but if one takes a longer time frame, the midcap segment has had some of the most promising businesses available in the listed space in terms of sectors like information technology, consumers, chemicals and agro-chemicals and pharma. These businesses have the potential to generate good earnings growth and also the potential of rerating to become the large caps of the future.

“We have seen that strong midcap businesses over time have graduated into large-cap businesses and the returns generated are good. Hence, good midcaps or a good midcap portfolio has the potential to generate reasonable risk adjusted return over a longer period of time,” said Naha.