HDFC Mid Cap vs Motilal Oswal Midcap Fund: Long-Term Value or High-Risk Play?

However, as of late 2024 and early 2025, it has exhibited corrections, reminding investors of the volatility mid-caps come with despite the high-return opportunities.

After hitting all-time highs in the first half of FY 2024-25, the Nifty Midcap 150 index corrected as a result of global uncertainties, elevated U.S. bond yields, and concerns around valuations. Therefore, profit-booking by a large institutional investor, and a more cautious approach towards investing ahead of upcoming global central bank meetings added pressure to the mid-cap index.

[Read: Decoding the Recent Market Correction: What's Behind the Fall in Mid and Small Caps]

Historically, the mid-cap space has been a sweet area for investors seeking high-growth-type companies who have recently begun their business expansion initiatives. Several of India's successful large-cap companies used to be mid-caps as well. Over time, mid-caps have continued to yield higher returns than large caps, with higher volatility. The recent correction provides potential investors the opportunity to accumulate, and this strongly appeals to investors who missed the previous rally.

Looking ahead, many mid-cap companies are positioned to benefit from structural themes including Make in India, digitization, renewable energy, and financial inclusion. However, stock selection and timing still matter, as not every mid-cap company has the same capacity to cope with a downturn or scale sustainably.

For investors, this is an opportunity to reassess their mid-cap exposure and consider if the schemes they own are in alignment with their risk tolerance and investment objectives. Not all mid-cap funds have the same style-- some are more aggressive and concentrated versus, more balanced and diversified.

[Read: Should You Invest in Mid-Cap and Small-Cap Funds Amidst Volatile Equity Markets?]

Keeping this in view, here's a thorough analysis of two prominent mid-cap schemes that have delivered superior returns during various market cycles.

# - HDFC Mid-Cap Opp Fund

Started in June 2007, the scheme currently has a strong AUM of Rs 67,579 crores. It is the largest scheme in the mid-cap segment following a bottom-up stock-picking approach with a focus on investing in quality mid-sized companies that have consistent earnings growth, strong management, and sustainable business models.

# - Motilal Oswal Midcap Fund

Launched in February 2014, Motilal Oswal Midcap Fund invests in a concentrated portfolio of mid-cap stocks that exhibit strong growth potential, high return on equity, and scalability. The scheme currently holds an AUM of Rs 23,704 crores. It tends to take long-term bets on a select few businesses with the belief that staying invested in quality companies over time delivers superior returns. This strategy can lead to sharp outperformance during bull markets but also exposes the fund to higher short-term volatility.

Performance Comparison: Rolling Returns

HDFC Mid-Cap Opportunities Fund and the Motilal Oswal Midcap Fund have both produced solid returns above the category average and the Nifty Midcap 150 TRI benchmark across several time frames. In the last year, for instance, while the HDFC Mid-Cap Opportunities Fund returned 42.40%, Motilal Oswal Midcap Fund delivered an impressive annual return of 56.40%, outperforming the category average of 40.50% and the HDFC Mid-Cap Opportunities Fund.

Furthermore, the long-term performance of these mid-cap funds, over the 3 and 5-year periods, is similar - working out at 28.32% and 28.92% CAGR for the HDFC Mid-Cap Opportunities Fund, versus a CAGR of 35.80% and 35.53% for the Motilal Oswal Mid Cap Fund - the gap is narrower over a longer time range.

[Read: 5 Mid Cap Funds Down by Over 15% in the Recent Market Correction]

Over a systematic analysis timeframe of 7 years, the two funds have again delivered similar performance, but over a 10-year time horizon, the difference is more pronounced. In reviewing performance outcomes, it is the Motilal Oswal Midcap Fund that has consistently displayed superior performance over the time horizon considered making it the fund of choice for wealth-seeking investors who are willing to take on more risk in the mid-cap equity universe.

That said, while higher returns are desirable, risk factors must also be considered, as generally the higher the return, the higher the risk and volatility outcomes.

[Read: 5 Small Cap Funds Down by Over 10% in the Recent Market Correction]

Portfolio Composition: Asset Allocation of Schemes

The portfolios of Motilal Oswal Midcap Fund and HDFC Mid-Cap Opportunities Fund demonstrate a bias towards mid-cap securities by their category mandates. There are differences between the two: Motilal Oswal has an overweight in mid-cap stocks at 69.67%, and a relatively high weighting in the small-cap space (23.08%).

This suggests a bolder approach, looking to capitalize on high-growth mid and small-cap opportunities while maintaining a far lower overall large-cap exposure (7.25%). In differential, HDFC Mid-Cap Opportunities Fund has a lower mid-cap weighting (65.87%), and also a lower small-cap exposure (20.44%). The fund has a small cap position in large caps (5.36%), which is also lower than Motilal Oswal.

This weighting suggests a more stable approach, with a bias to mid-caps at the same time being positioned to maintain lesser large and small-cap exposure in their portfolio. Those wanting a more distributed and aggressive small-cap exposure may lean to Motilal Oswal Midcap Fund; while those investors who would prefer stable exposure may invest in HDFC Mid-Cap Opportunities Fund.

Market Volatility: Risk Profile of Schemes

The Standard Deviation, which measures the fund's volatility over the past three years, is higher for the Motilal Oswal Midcap Fund (19.26) compared to the HDFC Mid-Cap Opportunities Fund (15.79). This indicates that Motilal Oswal Midcap Fund has exhibited greater fluctuations in returns, making it relatively more volatile. Investors in this fund must be prepared for larger swings in performance, which may not be suitable for those with a lower risk tolerance.

In terms of risk-adjusted returns, both funds have a similar Sharpe Ratio (0.33 for Motilal Oswal Midcap Fund vs. 0.34 for HDFC Mid-Cap Opportunities Fund), meaning they have delivered nearly the same level of excess returns per unit of total risk.

However, the Sortino Ratio, which only considers downside risk, is slightly higher for the HDFC Mid-Cap Opportunities Fund (0.68) compared to Motilal Oswal Midcap Fund (0.63). This suggests that HDFC Mid-Cap Opportunities Fund has been more efficient in delivering returns while minimizing downside volatility.

Top Holdings of the Schemes:

HDFC Mid-Cap Opportunities Fund and Motilal Oswal Midcap Fund both focus on mid-cap stocks, but their portfolio compositions reflect different investment strategies. HDFC has a more diversified allocation across sectors, with top holdings including Max Financial Services Ltd. and The Indian Hotels Company Ltd., both at 3.77% of assets.

On the other hand, Motilal Oswal Midcap Fund appears to have a concentrated strategy, with a significantly higher allocation to its top holdings. Coforge Ltd. and Persistent Systems Ltd., both from the IT sector, form nearly 20% of the fund's portfolio. Additionally, consumer-focused companies indicate a strong tilt toward high-growth businesses.

Unlike HDFC's fund, which spreads its holdings more evenly, Motilal Oswal Midcap Fund's approach leans towards sectoral bets and higher conviction in fewer stocks, which could lead to higher volatility but also greater potential for returns if its bets perform well.

Expense Ratio of the Schemes

As you can see, the HDFC Mid-Cap Opp Fund has a significantly higher Expense Ratio for direct plans as compared to the Motilal Oswal Midcap Fund. Whereas, under the regular plan HDFC has a lower expense ratio. Do note even a small percentage point difference in the expense ratio can accumulate over time and impact your returns.

Given that, Motilal Oswal Midcap Fund's lower expense ratio makes it a cost-effective option for many investors seeking a direct plan. However, remember that it should not be the only factor to consider when investing in sectoral funds.

Suitability of Investors to the Schemes:

HDFC Mid-Cap Opp Fund is suitable for moderately aggressive investors seeking stable, long-term growth through a diversified portfolio of quality mid-cap stocks. It follows a relatively conservative approach, making it ideal for those preferring lower volatility within the mid-cap space.

Motilal Oswal Midcap Fund, on the other hand, suits aggressive investors comfortable with higher risk. It follows a focused, high-conviction strategy based on the 'Buy Right, Sit Tight' philosophy, aiming for alpha generation over the long term.

To conclude...

The mid-cap segment holds strong long-term growth potential, especially in a growing economy like India where many mid-sized companies are evolving into future large caps. With government focus on manufacturing, infrastructure, and digitalization, many mid-cap firms are well-positioned to benefit from these structural shifts.

However, mid-cap stocks are more sensitive to market volatility, interest rate movements, and global uncertainties, which makes them riskier in the short term.

Investors should approach mid-cap funds with a long-term horizon of at least 5-7 years to ride out market cycles and benefit from compounding. Mid-cap allocation should ideally be a part of a diversified portfolio, contributing based on individual risk appetite. Pairing mid-cap funds with large-cap or flexi-cap funds can help balance risk while capturing growth.

Overall, disciplined SIP investing, proper asset allocation, and regular portfolio review can help investors make the most of the mid-cap opportunity.

Disclaimer: PersonalFN does not receive any monetary compensation from the fund house or scheme names stated in the article.

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.