Three mid-cap mutual funds based on risk-adjusted returns – Views on news from Equitymaster

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I’m Mitali Dhoke (Sr. Research Analyst), here to simplify mutual fund investing and guide you on a smarter journey to wealth creation!

The Indian mid-cap sector is at a critical juncture. After a phase of strong outperformance following the recovery from the pandemic, several mid-cap stocks have experienced higher volatility in 2025 due to global macro uncertainties, rising interest rates and sector rotations.

However, the mid-cap segment still offers great opportunities as the companies tend to balance scalability, growth flexibility and market resilience, which is often lacking in large caps.

While small caps come with extreme volatility and large caps can provide moderate growth during a period of high valuation, mid-caps balance growth and risk and are therefore considered a strategic option for long-term wealth generation.

In the prevailing market scenario, where selective growth sectors such as private banking, consumer and technology-related mid-caps are gaining popularity, investors should look at funds that not only generate returns but also manage risk.

These measures such as the standard deviation, the Sharpe ratio and the Sortino ratio are now important tools in this analysis. They help better explain how a fund performs compared to the risk it assumes, and provide insight into loss protection, portfolio risk and consistent return generation.

By paying attention to these parameters, investors can avoid funds that look attractive based on front-page returns but leave them vulnerable to unnecessary volatility or price declines.

In this context, some mid-cap funds have stood out for their stable risk-adjusted returns. These funds make it possible to follow the growth path of mid-cap companies without experiencing the more extreme fluctuations that can be present in smaller cap investments.

Our selection of the top 3 mid-cap funds is based on a data-backed evaluation of the five-year rolling CAGR and key risk measures such as standard deviation, Sharpe ratio and Sortino ratio, with an emphasis on funds that have delivered strong risk-adjusted performance over time.

Before we go any further, please note that this video is for informational purposes only. It is not a recommendation for any investment fund and should not be considered as such. There is no opinion or position on any plan discussed herein.

#1 – HDFC Mid Cap Fund

HDFC Mid Cap Fund, formerly HDFC Mid-Cap Opportunities Fund, launched in June 2007, remains one of the household names in the mid-cap segment. The fund is managed with a research-based, disciplined approach and looks for high-quality mid-market companies that can grow into market leaders of the future.

Rather than following fads or short-term momentum in the market, the fund follows a bottom-up stock selection philosophy, focusing on business fundamentals, management effectiveness and long-term earnings growth.

Over the past five years, the fund has delivered a rolling CAGR of approximately 31.15%, underscoring its potential to generate risk-adjusted premium returns. Good figures such as a low SD of 13.68 and a good Sharpe (0.42) and Sortino ratio (0.88) confirm the reliability of rewarding without taking too much risk.

As of September 2025, the fund has assets of over Rs 848.54, with around 65-70% exposure to mid-caps, supplemented with selective exposure to large and small caps for liquidity and tactical provisioning.

Major holdings include Max Financial Services Ltd. (4.76%), Balkrishna Industries Ltd. (3.54%) and Indian Bank (3.26%), representing a mix of cyclical recovery themes and structural growth opportunities.

Sector-wise, the allocation tends towards cars and accessories (16.33%), banks (13.35%) and healthcare (12.55%).

#2 – Nippon India Growth Mid Cap Fund

Nippon India Growth Fund is one of the oldest mid-cap funds in India with a robust tradition of beating the market through market cycles.

Since its inception in October 1995, the program has navigated several economic cycles, maintaining a focus on discovering high-quality mid-market companies with long-term growth prospects, improving profitability and scalable business models.

The fund’s investment philosophy is based on a growth-oriented, bottom-up stock selection strategy, looking for companies that are poised to become future large caps.

This strategy will enable the country to leverage India’s growth story through emerging leaders in sectors such as industrial manufacturing, financial services, auto components and consumer durables, which are gaining momentum in the current economic landscape.

Over the last five years, Nippon India Growth Fund has delivered a rolling CAGR of over 31%, supported by a standard deviation of around 15.20 and Sharpe (0.37) and Sortino (0.74) ratios in the mid-cap fund category.

As of September 2025, the fund has assets under management of approximately Rs 393.28 billion, with an allocation of over 70% to mid-cap stocks, supplemented with sensible large-cap stocks to absorb volatility.

Notable holdings include Fortis Healthcare Ltd. (3.33%), BSE Ltd. (2.64%) Ltd. and Cholamandalam Financial Holdings Ltd. (2.55%), representing a mix of cyclical and secular growth stories.

What sets the Nippon India Growth Fund apart is its long-term consistency and research-based portfolio construction, which allows it to remain resilient even in turbulent market phases.

#3 – Invesco India Midcap Fund

Invesco India Midcap Fund, which is known for its consistent alpha generation and rigorous risk management style.

The fund aims to invest in mid-cap companies with sustainable competitive advantages, scalable business models and robust balance sheets, seeking superior long-term returns with reduced volatility.

Unlike other peers that may place concentrated investments, the Invesco India Midcap Fund operates on a well-diversified, bottom-up investment style, blending growth and value ideas.

This style makes it possible to identify opportunities in different sectors, with a thorough emphasis on fundamentals and valuation discipline.

Over the past five years, the fund has delivered a rolling CAGR of approximately 30.95% with a modest standard deviation and a robust Sharpe ratio, demonstrating the fund’s potential to outperform the benchmark on a risk-adjusted return basis.

The fund’s steady build-up has been made possible by its selective exposure to high-potential sectors such as financials (21.14%), healthcare (18.34%) and retail (14%), where mid-market companies continue to benefit from domestic economic expansion and rising consumption trends.

As of September 2025, the fund manages an asset base of approximately Rs 85.18 billion, with over 70% exposure to mid-cap stocks, besides limited allocations to large caps for liquidity and small caps for tactical growth.

Key portfolio holdings include Swiggy Ltd. (5.14%), AU Small Finance Bank Ltd. (5.09%) and L&T Finance (4.9%), which represent a thoughtful balance between cyclical and structural growth factors.

Conclusion

In an environment where optimism and fear swing back and forth, risk-adjusted performance is the true measure of a fund’s strength.

The mid-cap sector continues to offer interesting opportunities, but investors must be able to distinguish between funds that deliver high returns thanks to their aggressive positioning and funds that combine growth with stability.

The capital at its heart here shows that disciplined risk management, quality stock selection and conviction can lead to long-term wealth creation without being subject to excessive volatility.

While historical returns are never a sure indicator of future results, a robust risk-adjusted performance history often shows that the fund manager is adept at taking advantage of changing market cycles.

For investors considering mid-cap exposure in 2025 and beyond, it should not be about chasing the best-performing funds, but rather funds that meet one’s investment horizon, risk tolerance and financial goals.

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Disclaimer: This article is for information purposes only and does not constitute any investment advice or recommendation to buy/hold/sell any fund. The returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you must choose the right fund to achieve your financial goals. If you are unsure about your risk tolerance, please consult your investment advisor/advisor. Investments in mutual funds are subject to market risks; read all fund-related documents carefully. Registration granted by SEBI, registration as IA with Exchange and certification by NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.