Mid-cap stocks remained under pressure in recent months, which led to erosion in the values of Mid-cap mutual fund schemes. Some experts are of the opinion that another 10-15% fall in mid-cap indices cannot be ruled out in the near term.

Given the current circumstances, it is vital to adopt a cautious approach while making fresh investments in Mid-cap mutual funds. Notably, despite short-term underperformance, Mid-cap mutual fund schemes have generated attractive returns over the long run, thus proving their ability as wealth creators.

Axis Midcap Fund is one such Mid-cap Fund whose focus on high-quality, growth-oriented mid-cap stocks has paid off its investors handsomely in the past.

Graph 1: Growth of Rs 10,000 if invested in Axis Midcap Fund 5 years ago

Past performance is not an indicator of future returns
Data as on June 22, 2022
(Source: ACE MF) 

Axis Midcap Fund is a growth-oriented mid-cap biased fund that focuses on investing in high-quality stocks of the mid and larger mid-sized companies that have the potential to grow cash flows over the medium to long term. Earlier, Axis Midcap Fund typically held a compact portfolio of around 35-50 stocks. However, over the last couple of years, the fund has gradually increased its holdings to around 55-65 stocks, owing to its growing asset size, that has grown by more than three times in the last two years. Axis Midcap Fund combines the growth potential of mid-caps with the stability of large caps to reduce the risk in the portfolio. During the market crash of 2020, the fund’s performance was commendable, wherein it managed to substantially limit the downside risk. However, it couldn’t participate in the ensuing recovery phase that was largely driven by momentum stocks. Nonetheless, over the past 5 years, Axis Midcap Fund has rewarded investors with a CAGR of around 15.9%, as against 11.1% CAGR delivered by its benchmark S&P BSE 150 MidCap – TRI index, thus generating a healthy alpha of about 5 percentage points in CAGR compared to the benchmark.

Table: Axis Midcap Fund’s performance vis-á-vis category peers

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
PGIM India Midcap Opp Fund	5,119	4.89	45.54	30.22	16.33	15.10	25.04	0.30
Quant Mid Cap Fund	511	6.96	42.49	28.40	17.98	13.96	24.79	0.28
SBI Magnum Midcap Fund	6,891	5.92	38.44	21.01	10.87	12.23	24.99	0.22
Edelweiss Mid Cap Fund	1,918	-0.04	36.40	20.14	13.23	13.57	24.72	0.21
Kotak Emerging Equity Fund	18,655	1.33	35.68	19.75	13.08	15.27	24.01	0.21
Baroda BNP Paribas Mid Cap Fund	1,116	-0.89	31.95	19.12	10.83	12.71	22.83	0.20
Motilal Oswal Midcap 30 Fund	2,624	17.35	38.77	19.10	11.42	11.73	25.06	0.19
Mahindra Manulife Mid Cap Unnati Yojana	889	-2.51	30.61	19.09	—	—	22.57	0.21
Axis Midcap Fund	17,165	-1.92	26.13	18.90	15.91	13.87	19.64	0.22
UTI Mid Cap Fund	6,373	-0.72	32.46	18.78	10.81	11.66	23.75	0.19
S&P BSE 150 MidCap – TRI		-2.77	32.46	18.42	11.12	13.23	25.51	0.19

Returns are point to point and in %, calculated using the Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on June 22, 2022
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

Axis Midcap Fund has significantly trailed the category average and its benchmark S&P BSE 150 MidCap – TRI Index in the last couple of years. However, its long-term track record still looks encouraging. Over the longer period of 5-years and 7-years, the fund has managed to keep a clear lead over its peers to find a place among the top quartile performers in the category. At the same time, it has recorded a decent lead over its benchmark during this period.

On the risk-return parameters, Axis Midcap Fund has encountered much lower volatility (19.64%) when compared to its category average (23.83%) and the benchmark (25.51%). Despite the recent underperformance Axis Midcap Fund has managed to fare well in terms of risk-adjusted returns. Its Sharpe ratio of 0.22 is currently among the highest in the Mid-cap Fund category and ahead of the benchmark, thus rewarding investors with superior risk-adjusted returns.

Investment strategy of Axis Midcap Fund

Axis Midcap Fund is mandated to invest a minimum of 65% of its assets in mid-cap stocks. It aims to select larger mid-cap companies which are flexible, innovative, and have high growth potential along with proven management and liquidity. Axis, as a fund house, is biased towards playing long-term growth stories and holds stocks with a long-term view. After the significant underperformance of Axis Midcap Fund in CY 2016, the fund management has been very careful in choosing stocks in the mid-cap space and the corrective measures it took to revive the performance of the scheme, finally paid off. The fund house strengthened the quality check and tightened the risk management process as well as the approval process. Moreover, the fund manager also restructured the portfolio of the fund to have a sharper focus. The results could be seen in the fund’s long-term performance.

Following a combination of the top-down and bottom-up approach of stock picking, Axis Midcap Fund invests in a fairly diversified portfolio of 55-65 stocks, limiting exposure to single stocks within the 5% mark. Through bottom-up stock picking, the fund focuses on company fundamentals and ignores the broad macro-economic trends. Although Axis Midcap Fund follows a buy-and-hold investment strategy, it is nimble in its approach and does not hesitate to churn a small portion of its portfolio to capture attractive opportunities in the mid-cap segment.

Graph 2: Top portfolio holdings in Axis Midcap Fund

Holding in (%) as of May 31, 2022
(Source: ACE MF) 

As of May 31, 2022, Axis Midcap Fund held a well-diversified portfolio of 65 stocks. The top-10 stocks accounted for around 30.2% of its assets, of which 3 are large-cap names. Cholamandalam Investment & Finance Co. topped the list with an exposure of around 4.7%, followed by ICICI Bank, Trent, Bajaj Finance, Avenue Supermarts, Coforge, PI Industries, Astral, Bata India, Tata Elxsi, etc. have been the other prominent holdings in the fund’s portfolio.

Axis Midcap Fund has gained immensely from its holding in Tata Elxsi, Cholamandalam Investment & Finance Co., Avenue Supermarts, Mphasis, Trent, Mindtree, and The Indian Hotels Company, which proved to be extremely rewarding in the last one year.

In terms of sector holdings, Axis Midcap Fund’s portfolio is skewed towards Financial Services and Infotech, with respective allocation of 15.3% and 12.5%. The other core sectors in the fund’s portfolio include Engineering, Retail, Auto Ancillaries, Consumer Durables, Fertilisers, Cement, Pharma, Chemicals, Oil & Gas, Consumption, and Textiles. The top 10 sectors together accounted for around 68% of its assets.

Suitability

Given the considerable rise in its corpus over the last one-year, Axis Midcap Fund may be nearing its capacity constrain. However, its reasonable exposure to highly liquid large and larger midcap stocks provides the fund with an advantage of a quick liquidation of the portfolio in case of extreme conditions.

Axis Midcap Fund avoids taking momentum bets and focuses on high-quality growth stocks. This helps it ride the tough market conditions well. Although the fund has recorded bouts of underperformance and the returns may not have come in easily over certain market phases, it is still well equipped to reward investors over the complete market cycle.

Axis Midcap Fund is suitable for long-term investors looking for a less aggressive midcap fund focusing on quality midcap stocks with a long-term horizon of at least 5-7 years.

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This article first appeared on PersonalFN here