Midcap funds gain traction as investors seek diversification in a volatile market

Mutual fund investors appear to be on a portfolio diversification drive. Data from the Association of Mutual Funds in India (AMFI) shows that investors have been opting for flexi-cap and mid-cap funds in an attempt to diversify their portfolios, which were previously dominated by large-cap and small-cap mutual funds.

The AMFI data shows that while flexi-cap mutual funds topped the charts, where inflows increased from ₹7,029 crore in September this year to ₹8,929 crore in October, the inflows in midcap mutual funds were ₹3,807 crore, the second highest amongst all equity funds.

The data shows a fall of close to 19 per cent in net inflows in equity mutual funds. The biggest losers in equity mutual funds have been large-cap and small-cap funds, with investors preferring to invest their money in flexi-cap and mid-cap mutual funds instead.

Mid-cap funds find favour

While flexi-cap mutual funds continue to dominate, it’s the mid-cap mutual fund category that is gaining interest. Since midcaps are also part of the flexi cap portfolio, market analysts believe that this category stands out for its performance.

For example, experts point out that in the last three years, Nippon India Growth Midcap Fund has given a 25% return, at a time when most equity funds are lagging.

In the same period, UTI Midcap Fund and DSP Midcap Fund have clocked in 21% and 18% returns, respectively.

In the last three years, of the 35 mid-cap funds across AMCs, just five mid-cap funds have given less than 20% returns, with the lowest still above 15%, reflecting the solid performance of the mid-cap fund category, market experts highlighted.

The Nippon India Growth Mid Cap Fund, launched over 30 years ago, has delivered a CAGR of 22% since its inception. The fund invests in companies that deliver above-average growth and have the potential to generate substantial returns over time.

The reason for the success of the fund could be a well-defined investment process, stringent risk management and in-depth research.

Mid-cap funds are ideal for long-term investments, and since they prioritise capital appreciation, investors get a steady increase in the value of their investments over time. Besides, mid-cap funds offer diversification across sectors, which helps mitigate risk. Additionally, the evolving market situation indicated investing in top mid-cap funds could be an ideal strategy at this juncture.

"FIIs turning buyers in India is a high probability scenario now. FIIs’ preference will be for large caps and high-quality mid-caps with good growth potential. The ideal investment strategy would be to play this potential trend by investing in top mid-cap funds," said VK Vijayakumar, Chief Investment Strategist, Geojit Investments.

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.