Top 5 Best Mid cap and Small cap Mutual funds to invest in 2017-2018 – Mutual funds are gaining popularity among the common populace, owing to it’s ability to offer high returns. Investing in mutual funds is considered a good option in the current scenario of dwindling interest rates. But the catch is in identifying the right category and funds which can offer good returns with low investment risks.
I have done an in depth study on the performances of various funds available in the market. The aim was to pick the best category and top five funds within that category. Special emphasis was given on identifying funds which consistently provided good returns with low risk portfolio.
Why Mid cap – Small cap Mutual Funds were selected for analysis?
In order to identify the best sector for investment, the performance of various fund sectors for the past three years were analysed. Let us have a look at the category average of annualised returns for the last three years.
|Comparison of 3 year annualised returns % between mutual fund categories|
|Category||Category Average||Top Performer|
|Mid cap Small cap Mutual funds||21.5||31.61|
|Sector – Financial Services||21.04||29.04|
|Equity – Other||16.58||26.75|
|Sector – FMCG||16.57||17.46|
|ELSS (Tax Savings)||16.45||24.89|
|Sector – Energy||16.09||20.4|
|Sector – Infrastructure||15.44||23.93|
|Sector – Healthcare||7.26||9.47|
|Sector – Technology||5.76||7.42|
|Global – Other||2.42||10.39|
The Mid cap Small cap Mutual funds category is having the highest category average of 21.5 % of average annualised returns for the past three years, followed by financial services sector, offering 21.04 %. It is note worthy that, the top performer offers a whopping 31.61 % of average interest rate.
So let us select the Mid Cap Small Cap mutual funds sector for further analysis.
Mid cap Small cap Mutual funds- preliminary list – 16 Good funds
From the umpteen number of funds available in the market, a preliminary selection was done to list 16 funds which performed better in the recent past. Funds which performed better than the category average in both 5 year annualised returns and 3 year annualised returns were selected.
|Number||Fund Name||5 year annualised returns||3 year annualised returns||Total assets under management||Expense ratio||1 year annualised returns||Top 10 list|
|1||Reliance Small Cap Fund – Growth||26.77||36.07||39,305||2.03||31.73||Selected|
|2||HDFC Mid Cap Opportunities Fund Growth||23.01||23.11||169,326||2.1||25.96||Selected|
|3||Kotak Emerging Equity Scheme Growth||25.19||20.43||20,438||2.1||25.22||Selected|
|4||Canara Robeco Emerging Equities Growth||26.66||29.31||19,941||2.22||35.06||Selected|
|5||Sundaram Select Mid Cap Growth||24.87||22.38||55,725||2.24||23.94||Selected|
|6||Sundaram Select Mid Cap Institutional Growth||25.48||23||55,725||2.24||24.45||Selected|
|7||Franklin India Smaller Companies Fund Growth||23.34||18.96||58,305||2.26||23.03||Removed|
|8||L&T Mid cap Fund Growth||27.21||34.71||10,466||2.28||34.27||Selected|
|9||DSP BlackRock Small and Mid Cap Fund Growth||24.1||22.11||41,126||2.31||25.61||Selected|
|10||Mirae Asset Emerging Bluechip Growth||29.48||31.39||40,052||2.35||32.81||Selected|
|11||Franklin India Prima Fund Growth||22.57||18.34||57,475||2.38||24.57||Removed|
|12||SBI Small & Mid cap Fund – Regular Plan – Growth||30.36||30.35||7,069||2.38||30.52||Selected|
|13||Sundaram S.M.I.L.E Fund – Institutional Plan – Growth Option||25.57||24.62||12,927||2.45||31.39||Removed|
|14||Sundaram S.M.I.L.E Fund – Regular Plan – Growth Option||24.97||24.03||12,927||2.45||30.86||Removed|
|15||DSP BlackRock Micro Cap Fund Growth||28.86||21.05||59,198||2.5||20.72||Removed|
|16||Aditya Birla Sun Life Small & Mid cap Fund Growth||26.69||25.83||9,167||2.58||31.71||Removed|
These selected funds were sorted in the ascending order of the expense ratio of the funds. The last four funds with high expense ratio were removed from the list. You may be knowing that funds with higher expense ratio is actually eating up on the profits of the investor.
I wanted to retain SBI Small & Mid cap Fund – Regular Plan – Growth which is currently in the 12 th position of the list owing to the high returns of above 30% in both 3 year and five year annualised returns. On analysing the remaining funds thoroughly two more funds were identified for elimination. (Franklin India Prima Fund Growth and Franklin India Smaller Companies Fund Growth). The reason behind the elimination is poor annualised performance compared to other funds.
Thus a solid list of 10 best funds with high returns and low expense ratio is ready for further analysis.
Mid cap Small cap Mutual funds – Semi Finalists – 10 Good funds
Now we have the list of ten best funds under mid-small Cap sector. Our aim is to eliminate five more funds to get top five funds from this list.
Since all these funds performed comparatively well, we will have to do thorough technical analysis for further elimination. The parameter which we are concentrating here is the volatility of the fund.
You may please note that higher the volatility, the higher will be the inherent risk while investing.
The funds can be divided into three categories based on the volatility – Below average, Average and High. Funds were again sorted within the category in the descending order based on their 3 year annualised returns.
|Rank||Name of Fund||5 year annualised returns||3 year annualised returns||Total assets under management||Expense ratio||Manager Tenure||1 year annualised returns||3 Year Volatility||Decision|
|1||Mirae Asset Emerging Bluechip Growth||29.48||31.39||40,052||2.35||7.1||32.81||Below Average||Selected|
|2||HDFC Mid Cap Opportunities Fund Growth||23.01||23.11||169,326||2.1||7.2||25.96||Below Average||Selected|
|3||L&T Mid cap Fund Growth||27.21||34.71||10,466||2.28||4.2||34.27||Average||Selected|
|4||SBI Small & Mid cap Fund – Regular Plan – Growth||30.36||30.35||7,069||2.38||3.8||30.52||Average||Selected|
|5||Sundaram Select Mid Cap Institutional Growth||25.48||23||55,725||2.24||4.8||24.45||Average||Selected|
|6||Sundaram Select Mid Cap Growth||24.87||22.38||55,725||2.24||4.8||23.94||Average||Removed|
|7||DSP BlackRock Small and Mid Cap Fund Growth||24.1||22.11||41,126||2.31||9.6||25.61||Average||Removed|
|8||Kotak Emerging Equity Scheme Growth||25.19||20.43||20,438||2.1||7.2||25.22||Average||Removed|
|9||Reliance Small Cap Fund – Growth||26.77||36.07||39,305||2.03||6.9||31.73||High||Removed|
|10||Canara Robeco Emerging Equities Growth||26.66||29.31||19,941||2.22||4.9||35.06||High||Removed|
The funds that came in the last five positions were eliminated to get the five finalists.
Mid cap Small cap Mutual funds- Final list – 5 best funds funds
All of our five finalists of the Mid Cap Small Cap mutual funds shoot out performed very well in the recent past. If you go through the chart you can see that the annualised returns offered ranged from 23 % to 34.71% which is really great performance.
Fund managers of the Selected Mid Cap Small Cap funds.
Fund managers play a decisive role in the performance of funds. The track record of fund managers adds to the confidence while investing in the funds. The period for which the manager is managing the fund is also an important factor to consider.
Neelesh Surana is the lead fund manager of Mirae Asset Emerging Bluechip Growth Fund. Neelesh Surana’s distinctive stock-picking ability and skilled execution are the defining factors in this fund. He has been associated with this fund from its inception. An interesting facet of Surana’s investing style is he sticks to his convictions even if the situation is contrary to his investment decision. The strategy is centred on a bottom-up stock-picking with exhaustive filtration laying emphasis to margin of safety. This approach limits the decision of the manager going wrong.
A key quantitative parameter he tends to follow is high return on capital and high cash flows. With this strategy, the fund has delivered above-average returns and has emerged as a winner in the respective categories. The fund’s lower expense ratio vis-a-vis its peers also makes the fund more appealing.
Chirag Setalvad the fund manager of HDFC Mid-Cap Opportunities Fund Growth ranks amongst the best portfolio managers in the India Small – Mid-Cap Category. He has been managing this fund since its inception in June 2007, and we view his long tenure at the fund house as a positive.Detailed and exhaustive research is central to his investment approach. Setalvad emphasises gaining an in-depth understanding of a business before investing.
Soumendra Nath Lahiri is the fund manager of L&T Mid cap Fund Growth since 22/06/2013. As this is comparatively a smaller period I am not going for a review of his performance. R. Srinivasan is managing the SBI Small & Mid cap Fund – Regular Plan – Growth since 16/11/2013. Sundaram Select Mid Cap Institutional Growth is managed by S Krishnakumar since 01/11/2012.
If we want to dig it further and find the best out of them, we have to go really deep in technical analysis. Let us do a thorough risk return analysis to do further ranking of these funds.
One of the best methods to be smart with mutual funds is to follow the Modern Portfolio Theory.
In Modern Portfolio theory we get the help of certain parameters like Alpha, Beta, R-Squared, Standard deviation and Sharpe Ratio of the funds. Let us analyse our top five funds using these parameters to find out the best out of these funds.
Alpha Ratio of Mutual Funds.
Alpha measures the difference between a fund’s actual returns and its expected performance. The +ve value of Alpha indicates that the fund has performed better than its Beta would predict. So higher alpha values are always desirable for any fund.
Highest Alpha values were shown by Mirae Asset Emerging Bluechip Growth and SBI Small & Mid cap Fund – Regular Plan – Growth.
Standard Deviation of Mid Cap – Small Cap Mutual Funds.
Standard deviation shows the volatility of fund returns in relation to its average. It tells you how much a funds return can deviate from the historical mean return of the scheme. For example if the fund has 12 % average rate of return and a standard deviation of 4%, it’s return can range from 8 – 16 %.
Lowest standard deviation was shown by Mirae Asset Emerging Bluechip Growth, followed by HDFC Mid Cap fund. No need to add that these funds can be considered comparatively safer to invest based on their past performances.
Sharpe Ratio -Mid Cap – Small Cap funds
Sharpe Ratio is known as reward- to- variability ratio and is named after William Forsyth Sharpe who coined this ratio.
Sharpe Ratio = (Total Return- Risk Free Rate)/Standard deviation.
The greater the portfolio’s Sharpe Ratio, better is risk adjusted performance. From an investors point of view the ratio describes how well the return of an investment, compensates the investor, for the risk he takes. Investors are advised to pick investments with higher Sharpe Ratio.
The info-gram given below will help you while analysing the technical data of mutual funds.
Based on the Sharpe ratio of our finalist funds the final ranking of the funds are as shown below. Mirae Asset Emerging Bluechip Growth fund clearly is a winner as per risk return analysis. All other funds closely follow the winner.
|Final Ranking of Top 5 Small Cap – Mid Cap funds based on Risk Return Analysis|
|Rank||Name of Fund||3Y Alpha||3Y Beta||3Y R-Squared||Sharpe Ratio||Std Dev||5Y Risk||3 year annualised returns|
|1||Mirae Asset Emerging Bluechip Growth||9.3||0.92||88.2||1.64||14.1||bel avg||31.39|
|2||SBI Small & Mid cap Fund – Regular Plan – Growth||9.9||0.96||66.14||1.42||17.16||Avg||30.35|
|3||L&T Mid cap Fund Growth||6.61||0.98||84.54||1.38||15.42||Avg||34.71|
|4||HDFC Mid Cap Opportunities Fund Growth||3.56||0.96||91.47||1.24||14.51||bel avg||23.11|
|5||Sundaram Select Mid Cap Institutional Growth||3.62||1.06||89.58||1.21||16.24||Avg||23|
I think I have given you a fair idea on the top MidCap SmallCap Mutual funds. But I would like to remind you few things.
- All these analysis are based on past performances of the funds. And you should remember that past performances need not be repeated in the future.
- Unexpected things can happen in the share market and always be watchful on the market trends.
- Before starting your investment, create a written list of objectives of investment.
- Keep a reasonable expected bench mark for your fund. It need not be as high as 20% to 30 %. (Say let it be 12 % -15% per year to be reasonable)
- Be patient on share market fluctuations.
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Anish L J is a ‘Financial Planner’ and member of Chartered Insurance Institute(CII), London and Insurance Institute of India. He is also a finance, insurance and software consultant. He thoroughly follows the developments in finance, insurance, and other related sectors.