Around 72% mid cap schemes failed to beat their benchmarks in the one-year horizon. The picture was marginally better in the three-year horizon. Around 58% of the schemes failed to beat their respective benchmarks in the three-year horizon. The underperformance was more pronounced in the five-year horizon. Around 86% mid cap schemes underperformed against their benchmarks in five years.
Many mutual fund advisors were apprehensive that actively-managed equity schemes would struggle to beat their total returns index or TRI-based benchmarks in the coming days. The Securities and Exchange Board of India or Sebi introduced TRI indices for mutual funds in February 2018. The trend is already visible in the large cap segment. However, most fund managers were confident that mid cap and small cap schemes would be able to generate alpha or extra returns over their benchmarks at least for another decade. However, this claim can be contested now.
Around 11 mid cap schemes failed to beat their respective benchmarks in all three horizons. Tata Mid Cap Growth Fund, one of the oldest mid cap funds, underperformed its benchmark in all three horizons. Taurus Discovery (Midcap) Fund also failed to beat its benchmark in all three horizons. DSP Midcap Fund, which manages more than Rs 13,000 crore AUM, also failed to outperform its benchmark in all three horizons.
Based on yearly returns since the launch of the total return index in 2018, mid cap funds underperformed their benchmarks in 2021 and 2022. In 2021, mid cap schemes offered an average return of around 42.83% against an average return of 48.11% by the benchmarks. In 2022, the category offered an average return of 2.11% against an average return of 4.04% by the benchmarks.
Based on the daily rolling returns, the mid cap category offered an average return of around 4.18% in a one-year horizon, 17.24% in three years, 13.06% in five years. The mid cap schemes are benchmarked against Nifty Midcap 100 -TRI, Nifty Midcap 150 -TRI, S&P BSE 150 Midcap -TRI, among others.
We considered regular and growth options of schemes for the study. Daily rolling returns of mid cap schemes were considered and compared against the benchmarks. Daily rolling returns for a one-year horizon were calculated for the period starting from May 15, 2022 to May 15, 2023. For the three-year horizon, rolling returns were calculated for the period starting from May 15, 2020 to May 15, 2023. For a five-year horizon, rolling returns were calculated for the period starting from May 15, 2018 to May 15, 2023.
Note, this exercise is not a recommendation. This exercise is just to find out how many mid cap schemes underperformed against their benchmarks. One should not invest or redeem their investments based on this exercise. Investors should always consider their investment horizon, risk appetite, and goals before making investments.
Mid cap schemes are usually recommended to aggressive investors who have a very high-risk tolerance and longer investment horizon of, say, seven to 10 years. A longer investment horizon helps investors to navigate the volatility better.
If you are looking for recommendations, see:
Best mid cap schemes to invest in 2023
