Mid-cap funds enter consolidation phase — is it time to stay invested or trim exposure?

Mid-cap mutual funds — which invest in companies ranked between 101st and 250th by market capitalisation — have long been viewed as the “sweet spot” of equity investing, offering a balance between growth and stability. After years of stellar performance, these funds are now under closer scrutiny as valuations stretch and returns begin to show early signs of moderation.

While mid-cap valuations are indeed elevated compared to historical norms, analysts suggest they remain a viable option for investors with patience, discipline, and a long-term approach. However, this phase calls for measured allocation and stronger risk management, especially as markets adjust to premium valuations and potential volatility.

Over the last decade, mid-cap funds have outperformed their large-cap peers, though with higher risk. According to Value Research, the average mid-cap fund delivered an annualised return of 15.53% over ten years as of mid-2025. Top performers like HDFC Mid-Cap Fund – Regular Plan have clocked close to 19% annualised returns during the same period. Yet, recent data shows that one-year returns have cooled to between 4% and 10%, highlighting the segment’s cyclical nature and the importance of a longer horizon.

The performance gap between mid-caps and large-caps has narrowed since the valuation surge of 2023. Mid-cap indices rose by about 27%, far outpacing the Sensex’s 14% gain that year. This rally, however, has driven price-to-earnings (PE) and price-to-book (PB) ratios above long-term averages — a sign that the market could be entering a consolidation phase. Analysts note that while mid-cap funds are not in bubble territory, investors should expect moderate returns going forward.

Liquidity, another focal point for regulators, has also come into play. The Securities and Exchange Board of India (SEBI) now mandates fund houses to disclose how long it would take to liquidate 25% of their mid-cap holdings. The recent disclosures showed time frames ranging from one to three days, reflecting the diversity in liquidity profiles. The directive aims to improve transparency and ensure that investors understand the underlying risks of the category.

Investor behaviour reflects this changing sentiment. Net inflows into mid-cap schemes dropped 34–36% in early 2025 as retail investors paused fresh investments following a strong rally. Only 18% of mid-cap funds have outperformed their benchmarks over the last three, five, and ten years — a sharp fall from about 65% before 2019. The decline in alpha generation reinforces the need for fund selection based on consistent process rather than short-term outperformance.

Despite these headwinds, mid-cap funds remain an attractive long-term proposition for those seeking higher growth. They typically deliver 15–30% annualised returns over extended periods but come with medium-to-high volatility. Financial planners generally recommend limiting exposure to 20–30% of the equity portfolio, preferably through the SIP route, and maintaining an investment horizon of at least seven years.

HDFC Mid-Cap Fund

Launched in June 2007, the HDFC Mid-Cap Fund – Regular Plan stands out as one of India’s most seasoned and stable mid-cap schemes. It invests at least 65% of its assets in mid-sized companies, aiming for long-term capital appreciation while maintaining diversified exposure across sectors.

As of November 2025, the fund manages ₹84,855 crore in assets — among the largest in its category. Its NAV stands at ₹200.81, up from ₹148.10 in 2023 — a 35% rise in two years despite volatile market conditions. The fund ranks 7th out of 58 peers in 2025, reflecting consistent outperformance.

Returns snapshot:

1-year: 5.42% vs. 3.01% (benchmark)

3-year CAGR: 28.35% vs. 26.55%

5-year CAGR: 12.29% vs. 3.64%

10-year CAGR: ~15–16%

In 2023, the fund gained 44.47%, followed by 28.35% in 2024. Over the past decade, it has multiplied investor wealth nearly nine times, with a Sharpe ratio of 1.29, well above the category average of 0.92, indicating strong risk-adjusted performance. A beta of 0.86 signals lower volatility relative to peers.

SIP advantage and portfolio structure

Systematic Investment Plans (SIPs) have proven especially rewarding for investors in this fund:

3-year SIP: ~20–25% annualised

5-year SIP: ~18% annualised

10-year SIP: ~16–17% annualised

The portfolio comprises 73 stocks, with an average market capitalisation of ₹49,800 crore. Top holdings include Max Financial Services, Balkrishna Industries, Indian Bank, Fortis Healthcare, and AU Small Finance Bank, collectively accounting for nearly 18% of assets. Sector exposure is tilted toward financials (24.7%), consumer discretionary (13.9%), technology (12.6%), and healthcare (12.5%), offering balanced diversification.

With a standard deviation of 13.86 (lower than the benchmark’s 15.77) and a moderate expense ratio of 1.08%, the fund strikes a balance between performance and stability.

Performance

The HDFC Mid-Cap Fund – Regular Plan remains a standout performer in the mid-cap space. For investors seeking long-term growth through disciplined SIP investing, it offers a compelling combination of strong historical returns, well-managed volatility, and sectoral balance.

However, given the inherent fluctuations in mid-cap stocks, it should form no more than 15–20% of an investor’s equity portfolio. With patience, discipline, and a horizon beyond seven years, this fund continues to deliver where it matters — steady wealth creation through India’s mid-cap growth story.