Mid-caps beat large-caps in returns, score low on volatility

CHENNAI: Mid-cap funds, which are usually considered more volatile, have gained at a faster pace than their larger peers in the medium to long-term. Interestingly, mid-cap funds were also less volatile than large-caps during the period.
Small and mid-cap funds generated higher returns than large-cap funds in the three-year, five-year and seven-year timeframe, data compiled by ratings agency Crisil showed.While small and mid-cap funds gained 6.1% on an average over the five-year period, large-cap funds advanced by only 5.7%. These funds also scored low on the volatility count as well.
Though small and mid-cap funds outperformed as a category, not all funds have given high returns. The difference in returns between the best and worst-performing funds varied from 7% in the 10-year period to 19% in the three-year period. This trend reiterates the need for investors to make well-researched investment decisions, observers said.
Mid-cap funds did well as they were more diversified than their larger peers. While the CNX mid-cap index has exposure to 29 industries, the CNX Nifty index, the underlying index for most large-cap funds, constitutes 17 industries.
In terms of concentration, there are only four industries with more than 5% exposure in the mid-cap index compared to nine for the Nifty. “Greater diversification and lower concentration help lower the risk for the mid-cap index,” said Mukesh Agarwal, President, Crisil Research.
Moreover, the mid-cap index has a 23% allocation to defensive sectors such as consumer staples and pharmaceuticals, which are less volatile, while the Nifty has only 10% allocation to these sectors.
“Thus, contrary to general perception, mid-cap indices and funds have shown lower volatility and higher returns,” Agarwal said. Retail investors can look at increasing their exposure to mid-cap stocks through mutual funds and benefit from higher risk-adjusted returns over the long run, he said.
Incidentally, the CNX mid-cap index gave 23% annualised returns over the 10-year period ending March 2013 while the Nifty increased returned 19% during the period. Volatility or risk measured by standard deviation for the CNX mid-cap index was also lower at 25% compared to over 26% for the Nifty for the period. The mid-cap index was less volatile over the three-year, five-year and seven-year timeframe as well.