We do not recommend the midcap schemes to new investors. We believe that the new investors are likely to be frightened by the volatility in the midcap space and they find it tough to hold their investments for the long haul.
Midcap Funds invest in mid-sized companies that have the potential to become large companies or leaders in their own fields. However, their journey to success is not a smooth ride. Any negative or unfavored news might have a major effect on your Midcap schemes and can erode your capital too.
But if it survives the impact and realizes their potential, then it may give you handsome returns as well on your holdings. This is a basic principle of investing in midcap schemes.
Simply put, Midcap funds are risky and can be extremely volatile as the market takes a sharp turn. But at the time of the bullish market, it has the potential to give you extra returns to compensate for the higher risk you are taking.
So, the big question now, how to choose 5 best midcap funds to invest in 2018.
- First, you should invest in midcap funds only if you have an investment horizon of at least 7-10 years.
- You should not lose the nerve and stay invested if the market is not in your favor at any particular period or market phase. Always keep one principle in your mind before investing, that midcap fund in short period of time can destroy your capital but that time requires to keep your nerve down and stay invested
Always need to consider some basic methodology to select the best midcap funds to invest
First, I would prefer these tools before selecting best midcap funds to invest in 2018
- Rolling Returns
Technically speaking, rolling returns are the average annualized returns taken for a specified period on every day/week/month and taken till the last day of the duration. For example, if you want to look at returns of an equity mutual fund in the last one year, instead of just looking at returns from say 31 January 2017 to 31 January 2018 you can look at one year returns on every day of the last year. Rolling returns is the best measure of a fund’s performance. Trailing returns have a recency bias and point to point returns are specific to the period in consideration. Rolling returns, on the other hand, measures the fund’s absolute and relative performance across all timescales, without bias.
- Mutual Fund Expense ratio
‘Mutual Fund Expense ratio’ is nothing but the recurring cost per unit- incurred to operate a scheme – and is charged to your assets. Such mutual fund expense ratio is calculated periodically but is charged daily on the NAV. Mutual Fund Expense ratio helps you to know how much you pay a fund every year to manage your investment. In case you have invested Rs1,00,000 in an MF, whose mutual fund expense ratio is 1.8%, you are paying Rs1,800 every year to manage your investment. That is, if MF is earning, say, 15%, your return would be 13.2%. The NAV’s are declared net of expenses. It is therefore important for you to know what the expense ratio of a mutual fund is. A higher mutual fund expense ratio will mean lower return for you and vice versa
- Alpha and Beta of the fund
Alpha is used in the Mutual fund as a measure of performance. Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index or benchmark which is considered to represent the market’s movement as a whole. The excess return on an investment relative to the return of a benchmark index is the investment’s alpha.
Beta is a measure of the sensitivity of a fund to its index. It shows the relation between the funds returns and that of its index. A beta of 1.2 means that the fund tends to rise and drop 20 percent more than the index does.
Alpha tells you whether that fund has produced returns justifying the risks it is taking by comparing its actual return to the one ‘predicted’ by the beta. Say, a fund can be expected to earn—based on its beta—a return of 12 percent in a given year. However, it actually fetches you 17 percent. Then the alpha of the fund is simply 17 – 12 = 5, that is, 5.
As per the above-mentioned methodology, we have shortlisted 5 best midcap funds to invest in 2018, where we can take exposure in our holdings to upgrade the returns over a long period of tenure.
At last, I would always suggest you, if you are looking to invest in midsized companies or in mid-cap space, you need to ensure that at least 7-10 years be invested then only you would be able to pocket the handsome return on your investment.
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