Contrary to general perception, mid-cap equities have shown lower volatility and higher returns compared to large-cap stocks over the last decade. This holds true for both indices and mutual funds, according to a CRISIL Research study.
Highlighting an interesting trend, the study reveals that mid-cap equities have outperformed the generally preferred (more liquid) large-caps. The rating agency has found out that mid-caps not only provided higher returns over longer time frames, but were also less volatile. CRIIL also extended the study to mutual funds as well, and reported similar results.
The study analysed the performance of the CNX Nifty Index (large-cap index) and CNX Midcap Index over a 10-year period until March 2013. While the CNX Midcap Index gave 23 per cent annualised returns over this period, the CNX Nifty Index returned 19 per cent. Volatility, measured by standard deviation (a risk measure), for the CNX Midcap Index was lower at 25 per cent compared to 26 per cent for the CNX Nifty Index.
CRISIL Research also looked at the past 10 calendar years to test the consistency of this hypothesis. Over this period, the CNX Midcap Index has outperformed the CNX Nifty Index in six out of 10 years. On the volatility front, the mid-cap index has been less volatile in 50 per cent of the observed instances, especially from 2007 onwards. In other periods too, the difference in volatility between the two indices was marginal. The study also evaluated the reasons behind the low volatility in mid-caps by studying the underlying sectors in each index since June 2006. One clear reason is diversification, CRISIL says.
CRISIL says that retail investors can look at increasing their exposure to mid-cap equity via mutual funds, and benefit from higher risk-adjusted returns over the long run. Mutual funds not only offer a diversified portfolio, but also professional fund management based on research which adapts to changing market scenarios
The study was then extended to mutual funds, namely large cap and small and mid-cap equity funds, to see if this trend was consistent. Small and mid-cap equity funds moved in line with the CNX Midcap Index, while large-cap equity funds shadowed the CNX Nifty Index.
According to the analysis, small and mid-cap equity funds have been less volatile as compared to large-cap funds across all periods of analysis (three, five and seven years).
Though small and mid-cap funds as a category outperformed, not all funds have given high returns, CRISIL study says.
The difference in returns between the best and worst-performing funds varied from 7 per cent in the 10-year period to 19 per cent in the 3-year period.
This trend reiterates the need for investors to make well-researched investment decisions.