Contrary to general perception, the mid-cap equities were found to be less volatile in the longer run and provided higher returns compared to large-cap equities, said a recent study by Crisil Research.

“The CNX Midcap Index returned 23 per cent annualised returns over the 10-year period ending March 2013, while the CNX Nifty Index returned 19 per cent. Volatility (risk) measured by standard deviation for the CNX Midcap Index was also lower at 25 per cent compared to over 26 per cent for the CNX Nifty Index,” Crisil Research Senior Director, Capital Markets Sandeep Sabharwal said in a report in Mumbai.

Even over other periods of analysis, like three, five and seven years, the mid-cap index was less volatile while it outperformed the CNX Nifty Index over a five year time-frame, Sabharwal said.

Mutual funds, too, displayed similar traits with small and mid-cap equity funds proving to be less volatile compared to large-cap funds across three, five and seven-year time frames and the former also generated higher returns over multiple periods but not all individual funds managed to do it, he stated.

The difference in returns between the best and worst performing funds varied from 7 percent in the 10 year period to 19 percent in the three year period, thus reiterating the need for investors to make well researched investment decisions, he said.

According to Mukesh Agarwal, President, CRISIL Research, the study also evaluated the reasons behind this trend and noted that the CNX Midcap Index was more diversified vis–vis the CNX Nifty Index at both sector and stock levels.

“The CNX Midcap Index has exposure to 29 industries against 17 in the CNX Nifty. In terms of concentration, there are only four industries with more than 5 per cent exposure in the mid-cap index compared to nine for the CNX Nifty Index.

Thus, greater diversification and lower concentration help lower the risk for the CNX Midcap Index.

“Secondly, the CNX Midcap Index has a 23 per cent allocation to defencive sectors, which are less volatile, such as consumer staples and pharmaceuticals, while the CNX Nifty Index has 10 per cent allocation to these sectors,” according to the study.

Thus, contrary to general perception, mid-cap indices and funds have shown lower volatility and higher returns vis–vis large cap indices and funds and retail investors can look at increasing their exposure to mid-cap equity via mutual funds, the report said, adding, that it is, however, important for investors to select the mutual funds.