How 20 midcap funds delivered up to 426% returns over 10 years

Over the past decade, 20 midcap mutual funds have demonstrated remarkable returns. The worst performer still managed a 238% return, while the top achiever surged 426%. On average, these funds delivered a 324% return, turning Rs 1 lakh into more than Rs 4 lakh. Invesco India Midcap Fund topped the list with 426%, followed by Edelweiss and Nippon India Growth Midcap Funds at 409% and 403%, respectively.

Nine schemes returned over 350%, and 11 delivered more than 300%. The weakest performer, Aditya Birla Sun Life Midcap Fund, still returned 238%. This translates to an annualized return of about 13-18%, with the average at around 15.5%.

What makes midcaps so powerful? Experts attribute it to three factors: earnings growth, valuation rerating, and sustained investor flows. Midcap companies often have reached a scale that makes them more resilient while still retaining growth potential. They also benefited from economic formalization, increased capital expenditure, and manufacturing growth.

Furthermore, the segment attracts a diverse range of investors, from growth and quality to momentum, value, and contra strategies, helping sustain liquidity and interest.

However, the success comes with challenges. Valuations have already become elevated, making it difficult to replicate the rerating component of historical returns. As assets under management grow, it may become harder to enter and exit positions without affecting prices. Additionally, the limited universe of midcap stocks can lead to portfolio overlap, making it challenging to find genuinely differentiated investment opportunities.

Financial planners should consider a more conservative return assumption of 10-12% annually, rather than relying solely on historical data.