UTI has launched UTI Nifty Midcap 150 Quality 50 index fund in April 2022.
DSP launched DSP Nifty Midcap 150 Quality 50 ETF in December 2021.
The two funds track the Nifty Midcap 150 Quality 50 index. Should you invest?
Do you invest in midcap stocks or midcap funds?
Yes? Then, which type of midcap stocks do well? OR
No? While you want to invest in midcap stocks, you believe there is a lot of junk in midcap stocks and want to avoid such stocks.
Well, there is a strategy index in the midcap space (Nifty Midcap 150 Quality 50) that aims to do exactly that. The index fund picks “quality” midcap stocks from the entire midcap universe (Nifty Midcap 50).
Would a portfolio of such quality midcap stocks outperform the Nifty Midcap 150 index? And give actively managed midcap funds a run for their money?
Let’s find out.
Read: How to build the “Best” portfolio using index funds and ETFs?
How does Nifty Midcap 150 Quality 50 index select stocks?
The parent index is Nifty Midcap 150 index. The 50 quality stocks are selected from the universe of midcap stocks in Nifty Midcap 150 index.
How is “Quality” defined?
There is no objective definition of what constitutes a quality stock. There can be many different definitions. We will look at how NiftyIndices defines “Quality” for this index.
While selecting stocks in the Quality index, the stocks in Nifty Midcap 150 are ranked on the following parameters and top 50 stocks are chosen.
- Return on equity (Higher the better)
- Debt-to-equity (except for financial services companies) (Lower the better)
- Variability in EPF growth (Lower the better. Stable earnings are better)
The data is considered for the previous 5 years. All the parameters are given equal weightage. The index is rebalanced semi-annually.
You can read the detailed methodology here. You can also look at the current constituents here (you will not get the weight of each stock). You can check the sectoral breakup and top constituents as on the end of last month in the factsheet.
Do Quality Midcap stocks do well?
Let’s compare the performance of the Nifty Midcap 150 Quality 50 index against the parent index Nifty Midcap 150). Additionally, let’s compare the performance against a few popular actively managed midcap funds.
- Nifty Midcap 150 Quality 50 (Price index)
- Nifty Midcap 150 (price index)
- DSP Midcap Fund
- Kotak Emerging Equities
- Nippon India Growth Fund (earlier Reliance Growth Fund)
I have considered the regular plan of the 3 midcap funds for this analysis since I wanted to analyze and compare performance for a longer term. There were 5 midcap funds with AUM of over Rs 10,000 crores (that’s a good measure of popularity). Apart from the above 3, there was HDFC Midcap Opportunities and Axis Midcap Fund. Axis Midcap was launched in 2011 while HDFC Midcap Opportunities lost out on vintage. I wanted to pick just 3 funds to keep the charts simpler.
To avoid giving unnecessary advantage to the midcap indices, I have considered the Price index instead of Total Returns index (TRI).
We consider the data from April 3, 2007 until August 31, 2021.
Nifty Midcap 150 Quality 50: Performance Comparison
Nifty Midcap 150 Quality 30 is a clear winner. Rs 100 grows to 1,032. CAGR of 17.6% p.a.
DSP Midcap: Rs 934. CAGR of 16.8% p.a.
Kotak Emerging Equities: Rs 688. CAGR of 14.3% p.a.
Nippon India Growth: Rs 774. CAGR of 15.3% p.a.
Nifty Midcap 150: Rs 100 grows to Rs 656. CAGR of 14% p.a.
As always, point-to-point returns do not present the complete picture. Let’s look at the calendar year and rolling returns.
An interesting observation. Whenever the midcap stocks (Nifty Midcap 150) have given negative returns, Nifty Midcap 150 Quality 50 has been the best performer.
Look at the returns in the years 2008, 2011, 2013 and 2018. The only exception is 2019.
Nifty Midcap 150 Quality 50 did not have massive outperformance years, compared to other funds. However, it did not lose as much when the midcap stocks went through a bad phase. It lost less. And losing less is the key to investment success.
Nifty Midcap 150 Quality 50: Rolling Returns comparison
Again the Midcap Quality index is not setting things on fire. In fact, it has not been the best performer in 3-year rolling returns data for better part of the last 10 years. Still, it does very well.
Let’s look at the decadal returns too.
Nifty Midcap 150 Quality 50 beats the Nifty Midcap 150 index easily and consistently. And keeps up with the best performing midcap funds.
The above chart also highlights the issues with active funds. Look at how Kotak Emerging Equities struggled until 2010 and has done very well in the last decade. Exactly the opposite for Nippon India Growth Fund.
What about risk characteristics?
Nifty Midcap Quality index does well on the volatility front too. Manages drawdowns better compared to the Nifty Midcap 150 index.
The Caveats
Nifty Midcap 150 Quality 50 index beats Nifty Midcap 150 index easily on both risk and returns metrics.
Midcap Quality index does better or equally well compared to some of the most popular actively managed midcap funds. And it does not have any fund manager risk.
However, there are a few aspects that you must keep in mind.
There is no index fund or ETFs based on Nifty Midcap 150 Quality 50 index at present. Hence, there is no easy way to take exposure to this passive strategy.- The Nifty Midcap 150 Quality 50 index was launched only in October 2019. Any prior data is back-fitted. Hence, you would expect past returns to be good.
- Interestingly, the Nifty Midcap 150 Quality 50 index has underperformed Nifty Midcap 150 since its launch in October 2019.
- Past performance does not guarantee future performance.
- While the performance of the midcap quality index is impressive, it does not mean this is the best way to invest in midcap stocks. We have not tested any other strategy.
I like the concept. I believe investing in quality midcap stocks is a good way to build a portfolio of midcap stocks. If you share the same belief, you can consider taking exposure as part of the satellite equity portfolio.
Source/Additional Links
How to build the “Best” portfolio using index funds and ETFs?
Nifty 150 Quality 50 index: Product page
4 thoughts on “Invest in midcap stocks? Do quality midcap stocks do well?”
Hi
Can the alternate be Nifty next 50 ETF. This ETF has 32% in Midcap. Since Nifty next 50 comprise of companies which are in line to become nifty, can it be assumed that the 40% of midcaps are of high quality stocks.
Also is it advisable to go for a midcap which has 150 stocks. The actual weightage of many are less than 0.50% (I just checked nippon midcap 150 stocks). Is it not trying to being diversified without much benefit.
Hi Ninan,
How do you say the Nifty Next 50 has 32% midcap?
Btw, I wrote about using Nifty Next 50 as midcap allocation here (https://www.personalfinanceplan.in/nifty-next-50-index-large-cap-or-midcap-fund/)
I suggest let’s not assume anything and go with data.
About midcap fund of 150 stocks, I assume you are talking about Nifty midcap 150 index funds. I get your point but that’s always the case with any market cap based index. The weight of smaller stocks is quite low. That would happen in Nifty 50 or Nifty Next 50 too. The weight will automatically increase if the stock does well (and that’s the beauty). Btw, S&P 500 is an index of 500 stocks.
I had a hunch you would definitely be writing on this midcap quality space when I saw the UTI NFO. Haha
Few glitches as observed:
1. You have mentioned ” axis bluechip ” instead of “axis midcap”
2. “There is no index fund or ETFs based on Nifty Midcap 150 Quality 50 index at present. Hence, there is no easy way to take exposure to this passive strategy.” —> There are 2 now as you pointed out at the starting of the article.
My view:
In my opinion, midcap space still isn’t ready for a passive way. Fund managers are able to easily beat the indices. In fact, a mention of how many active Midcap funds beat these 2 midcap indices ( midcap 150 index and midcap 150 quality 50 ) over 3 years, 5 years, 10 year period would have thrown a better light.
One more pointer from my side. People who are investing in passive strategy are mostly DIY investors ( assumption based on the fact that distributors won’t sell index funds due to low commission structure ).
Hence, a comparison of active midcap DIRECT fund vs 2 midcap index funds would have given better clarity.
Since this midcap quality 50 index fund is Factor-based, the expense ratio would be on the higher side. If the active midcap direct fund is charging a 0.4 expense ratio and if uti/DSP is charging 0.3, it would be an interesting competition to watch out for.
Hi Sumanas,
Thanks for pointing out these mistakes. Had written this post about 6 months back when there were no such products. Glad you pointed out these errors.
1. Active vs Passive is also about faith. About peace of mind. Not just the returns and the expenses. It is not that no active midcap fund will outperform passive indices. Of course, a few will. The question is how do you figure those funds out. How do you ensure there is no style drift or the usual fund manager risks don’t materialize? An index fund ensures that the stock picking rules will be adhered to. I agree actively managed midcap funds have better prospects than actively managed large cap funds (the midcap space may not be as well researched). However, the outperformance is going down. Please check the mid year 2021 SPIVA report. You can compare across years. https://www.asiaindex.co.in/documents/spiva/spiva-india-mid-year-2021.pdf
Disclosure: Have been using actively managed midcap funds for my and my clients’ portfolio. No midcap index funds yet.
2. Comparing active funds: Picked up 3 in this post. Not possible to pick all. SPIVA report has the answers you are looking for. Direct is only since 2013.
3. Expense ratios can go down when there is competition. About 8-10 years back, even Nifty/Sensex index used to be very expensive. But yes, the industry needs to do better.