Mutual Funds

Best midcap mutual funds to invest in 2018

Midcap equity mutual fund schemes may be badly hit in the recent stock market turmoil. However, you shouldn’t doubt their potential to make investors rich over a long period. That explains why mutual fund advisors continues to recommend these schemes to investors with high risk appetite and longer investmentperiod.

Even investors continue to fancy midcap equity mutual fund schemes. Probably, because their eyes are glued to the eye-popping historic returns offered by midcap equity schemes. For example, we get many messages on our Facebook page, from both existing and new investors, asking for the best midcap schemes to invest.

We do not recommend midcap mutual fund schemes to new investors. We believe that new mutual fund investors would not be able to handle the volatility associated with midcap stocks. Often, new and uninformed investors get spooked by the volatility and abandon their investments. This is the reason why we ask investors to choose midcap schemes only if they have a very high risk tolerance level and an investment horizon of seven to 10 years.

Those who came in late, midcap equity mutual fund schemes invest in mid-sized companies that have the potential to become large companies or leaders in their own field. However, their journey towards greatness may not be a smooth ride. Any small setback (negative news or development) may have a huge impact on their stock prices. If they indeed become great companies, investors are in for a treat. These stocks can reward investors handsomely. This is the basic premise of investing in midcap schemes.

Simply put, midcap schemes are risky and can be extremely volatile. But they also have the potential to offer extra returns to compensate for the higher risk you are taking. However, if you do not have the stomach for higher risk and a long investment horizon, you should stick to relatively less risky options like a largecap scheme.

Also Read : Best Largecap Mutual Funds to invest in 2018

So, if you are planning to or invested in midcap schemes, here are some things you should keep in mind. One, give your investments a lot of time. As said before, you should invest in a midcap scheme only if you have an investment horizon of at least seven to 10 years. Find a good scheme which has been around for a while and has a record for consistency if you don’t want much volatility. Don’t lose the nerve and stay invested even when things look very bleak. if you follow these rules, rest assured: you would get to pocket impressive returns at the end of your investment horizon.

To make your investment easy, we have handpicked five midcap equity mutual fund schemes for you.

Scheme name 1-year return (%) 3-year return (%) 5-year return (%)
L&T Midcap Fund -8.97 12.61 26.07
HDFC Mid-Cap Opportunities Fund -7.07 10.21 23.57
DSP Midcap Fund -9.85 10.11 23.10
Kotak Emerging Equity Scheme -8.84 9.36 25.37

Our methodology: Mutual Funds has employed the following parameters for shortlisting the Equity mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.

i) When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
ii) When H <0.5, the series is said to be mean reverting.
iii) When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series

3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.

X =Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z

4. Outperformance: It is measured by Jensen’s Alpha for the last three years. Jensen’s Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.

Average returns generated by the MF Scheme =
[Risk Free Rate + Beta of the MF Scheme * {(Average return of the index – Risk Free Rate}

5. Asset size: For Equity funds, the threshold asset size is Rs 50 crore

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