The Hindu Business Line : Many MFs keen on launching mid-cap funds

SEVERAL mutual funds keen on making the most of the mid-cap rally have filed with the SEBI their offer documents for launching mid-cap funds. Fund houses are approaching the market regulator to launch both pure mid-cap funds and multi-cap funds.

While mid-cap funds would invest in equities of companies with market capitalisation largely in the Rs 1,000-1,500 crore range, multi-cap funds are structured in a manner that would enable them to invest in large, mid- and small-cap scrips in a predetermined ratio.

Both JM Financial and ING Vysya mutual funds recently filed offer documents for launching pure mid-cap funds.

Similarly, Cholamandalam AMC and Franklin Templeton have filed offer documents for funds that would invest across the entire market capitalisation range, including mid-caps and small-caps.

The new interest in this sector is fuelled largely by the remarkable growth registered in the mid-caps index.

The CNX Mid-Cap 200, the NSE's index of mid-cap companies, touched all-time high levels this year. The index is currently at levels upwards of 2,100, an appreciation of over 16 per cent since the beginning of the calendar year.

The outlook on this sector, while continuing to be bullish, also demands a lot of caution, according to market participants.

Even though, the liquidity of most mid-cap scrips has augmented considerably, the increased institutional and mutual fund interest in the sector could be counter-productive, said analysts.

"We are aware that the impact cost of mid-cap stocks could be substantially high. Stock picking should be accurate and retail investors should choose their stocks carefully," said Mr Krishnamurthy Vijayan, CEO, JM Financial Asset Management.

There are concerns about liquidity in mid-cap stocks on two fronts. First, at volume levels that institutions invest in, it might be hard to find buyers when a sell decision is made.

Secondly, the free float and liquidity of some of these scrips are so low that order values of even Rs 1 lakh could trigger the circuit filters.

"Most times, this means that FIIs, high net worth individuals and mutual funds are buying the same set of mid-cap scrips," said a broker.

Large broking houses are being hustled by these clients to find new "mid-cap stories" because of the lack of depth in the market.

Research on mid-cap stocks is an expensive proposition. "Every stock that we decide to track has to be assigned to an analyst. Analysts cannot be overburdened by the sheer number of scrips they track, so quality research is becoming a bit of a problem," said the head of equities of a foreign broking house.

"We keep our ears to the ground and only as and when we find an exciting story do we assign an analyst to make a report."

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