The key takeaway from the above data is that mid cap stocks are in a sweet spot in the equity market. The reason is that mid cap stocks are generally beyond their initial growth stage but still have ample scope for growth.
Top performing mid cap mutual funds: Strong throughout multiple years
A closer look at the annual data further reinforces the case for midcaps. In 2023, mid cap mutual fund delivered an impressive 124 per cent return, outperforming large caps, which returned 61 per cent during the same period. Similarly, in 2014, midcaps posted a remarkable 136 per cent return, again surpassing both large caps and small caps.
These figures show that midcaps have repeatedly generated strong returns during bullish market phases. Their ability to capture growth opportunities while maintaining relatively stable business fundamentals has helped them outperform in several cycles.
Balancing growth and stability
One of the major reasons for the prominence of the midcaps is that they have the ability to provide growth as well as stability. While small cap mutual funds have the potential to generate high returns, they also have the potential for high volatility and high drawdowns, especially in times of correction in the market.
While large cap mutual funds provide stability, they might not have the potential for high growth, as seen in emerging companies. The midcaps provide high growth potential relative to large caps while offering lower risk relative to small caps.
For example, in 2020, when the market environment was not favourable, the midcaps were able to generate 10 per cent returns, while small caps were in negative territory, reflecting -13 per cent returns.
Earnings growth advantage
The next factor that is also favouring midcaps is earnings growth. When companies move from the small cap category to the mid cap category, their revenue growth tends to accelerate.
The Edelweiss data also shows that midcaps are not just high-growth stocks; they are also long-term performers.
Hidden engine of long-term wealth
While large caps dominate headlines and small caps attract attention during bull runs, midcaps somehow manage to slip into the background. However, data suggests that they have been quietly providing some of the most consistent and rewarding returns in the market.
For investors who want to create wealth in the long term, midcaps could very well prove to be one of the most balanced opportunities in the equity market, according to the data by Edelweiss Mutual Fund.
