We continue with our learning series – Money Master. It is meant for you if you are willing to explore investing and financial planning in greater depth. With use of case / problem based learning, you get to cruise through a topic / sub topic to understand, solve a problem and, in the process, learn more about mutual funds, equity, asset allocation, financial planning and building a portfolio.
On to today’s case.
Is it a mid cap or a mad cap fund?
In your annual portfolio review, you have decided to add a mid cap fund to your portfolio. You already have the required allocation to large caps in your core portfolio.
In the mid cap fund category, there is one fund (Fund A) that has caught your eye for its pedigree, returns and experience. You are keen to invest in it.
You check with your advisor, who tells you about another mid cap fund (Fund B) with a better focus on Mid caps / Small caps and also has the relevant experience under the belt. However, the current performance numbers for this fund look weak.
If you are one for the star ratings, it gets just 3 stars. 🙁
Not just that, when compared to other funds, it lags most of them. Don’t even talk about comparison with the midcap index!
More than mid cap, this one looks like a mad cap!
Now, Mid cap Fund A (that you found out) has delivered a couple of extra basis point returns than Mid cap Fund B. Not just in last 1 year but also over 3 and 5 years. It has a 5-star rating too.
You want some further information on the portfolios. The advisor shares the portfolios and market cap allocation for both the funds with you.
You see that Fund A has about 15 to 20% large cap in its portfolio, while Fund B has none. In fact, Fund B has 70% in mid caps and the balance in small caps.
You are now confused. Which fund is the right fit for your portfolio? The one with the higher returns and star ratings or the other one?
Working questions
- What do you infer from the above information available to you?
- How does the portfolio structure of the funds impact the risk and performance parameters?
- Which of the above information is redundant or not required to make your decision?
While the fund names are not disclosed, extra points if you can also identify the funds. Share your detailed responses in the comments box.
Note: *A mid cap company on the basis of market defined by SEBI guidelines is one lying between 101st to 250th rank. The first 100 are large caps and 251st onwards are categorised as small caps.
I’m Assuming both fund managers are equal in experience and pedigree.
I think fund A , though Midcap oriented also follows the trend a bit. Thus having a good amount of large caps. While fund B is pure Midcap, sticking to its universe of stocks.
I will select fund B to be part of my portfolio.
Since I already have a large cap allocation, my portfolio has already got whatever alpha the large cap stocks have fund A. Fund B, though lagging now will give me the alpha/performance that the mid cap portion of my portfolio is expected to give me.
Since I am taking care of the market cap based allocation myself, better to hv pure midcapfund B.
The last 1 year or 3 year performance Tarun is irrelevant to me. However since I have picked a pure midcapfund B, it’s long term performance in comparison with the Midcap index will be useful information