Mid-Cap Funds Lag Nifty Midcap 150 Index: Shift to Index Funds?

Actively managed mid-cap mutual funds in India largely fail to consistently outperform their benchmark, the Nifty Midcap 150 index. A comprehensive report, evaluating performance consistency, highlights significant underperformance across various timeframes.

The analysis focused on rolling returns outperformance, where a fund must beat its benchmark at least 70% of the time to be considered consistent. This threshold is deemed reasonable given the high fees charged by Asset Management Companies (AMCs).

Key Underperformance Metrics

• Over a five-year period, only 4 out of 21 direct plan mid-cap funds achieved 70% or more rolling return outperformance consistency.
• When simultaneously evaluated over five, four, and three-year rolling return periods, only 2 out of 21 funds qualified.

The study included 21 direct plan mid-cap funds, each with a minimum of a five-year rolling return history. These findings indicate a systemic challenge for active management in the mid-cap space.

Strategic Index Fund Alternatives

Given the consistent underperformance, the report suggests investors consider opting for index funds. For broad exposure to mid-cap and small-cap segments, a Nifty 500 index fund is presented as an optimal choice, despite its large-cap orientation.

The Nifty Next 50 remains a traditional recommendation for dedicated mid-cap stock exposure, though its evolving nature towards becoming more large-cap-like is noted. Reservations are expressed regarding a Nifty Midcap 150 index fund due to potential performance during market crashes and AUM challenges.

Ultimately, a combination of Nifty 50 and Nifty Midcap 150 is proposed as a plausible strategy for investors. This approach acknowledges that the Midcap index can experience periods of underperformance relative to large-cap stocks.