As per our analysis, among various categories of equity mutual funds, small and mid-cap funds were standout outperformers, across periods analysed (see table). They were also able to generate double-digit positive returns over the last one year, compared with negative performance or abysmal returns generated for other categories. All equity mutual fund categories, however, beat the market benchmarks across periods analysed.
Within these categories, small and mid-cap funds allow investors to seek exposure to small and mid-cap stocks, which offer good wealth creation opportunities over the long-term (7-10 years), given their potential to grow faster than large-cap stocks. An analysis of Crisil-ranked small & mid-cap funds reveals investments in small & mid-cap stocks in the range of 63-99% over last three years, ending November 2015. Funds with higher exposure to these stocks have performed better than ones having lower exposure. Stock selection played a decisive role in helping the category generate alpha. Portfolio analysis shows the top 26 stocks - covering around 25% of assets - gave an average 34% compounded annualised growth rate (CAGR) over the three-year period ended November 2015, compared with only 12% CAGR for large cap funds.