Mid- and Small-Cap Funds Outshine Large-Cap Counterparts Over Five-Year Period

Market Volatility Shifts Focus from Largecaps to Midcaps and Smallcaps

Investors have been shifting their focus back towards largecap funds in recent months, as volatility returned to the market. However, a closer look at the past five years reveals a different story. Midcap and smallcap funds have outperformed largecap funds significantly over the long term, with some funds delivering nearly double the average return of largecap funds.

Over the past five years, the average largecap fund delivered a 5-year return of 11.71 percent. In contrast, several midcap and smallcap funds delivered over 21-22 percent compound annual growth rate (CAGR) over the same period. This sizable gap in returns highlights the potential benefits of investing in midcap and smallcap funds.

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However, not every midcap and smallcap fund delivered standout performance. Despite the strong category returns, only a handful of funds managed to outperform their benchmarks over five years. Among midcap funds with assets above Rs 1,000 crore, only seven out of 29 funds beat the Nifty Midcap 150 TRI. In smallcaps, only 11 out of 28 eligible funds managed to outperform the Nifty Smallcap 250 TRI.

The data also shows that midcap and smallcap funds have been volatile recently, with the top-performing smallcap funds delivering negative returns over the last six months. This highlights the importance of choosing the right fund, as even strong long-term performers can experience short-term declines.

A good example is the Motilal Oswal Midcap Fund, which was the best-performing midcap fund over five years with a CAGR of 22.82 percent. However, it was also down 12.55 percent over the last six months and down 3.85 percent over one year. This contrast sums up broader market investing quite well: the long-term rewards can be high, but the journey is rarely smooth.

The data shows that mid- and smallcap funds have created significantly higher wealth than largecaps over the last five years, despite the recent volatility in broader markets. However, it also highlights the importance of strong fund selection, as strong category returns do not guarantee benchmark-beating performance.

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