The Hindu Business Line : Small, mid-cap funds

Think of tiny acorns that may one day become great oaks. Think of pale stars waiting to turn into dazzling supernovas. Think of one group of equity funds that lots of people in the market think has the potential to make big news. Think of small- and mid-cap funds and you will know why we have to draw such elaborate parallels.

This group, as investment circles will no doubt tell you, has thrown up a surprise or two in the past couple of years. Their numbers have increased, the stocks they have followed have multiplied and their investor bases have swelled.

Recent developments - the soaring valuations of a large section of small-cap stocks, the dramatic declines some of them have suffered and an assembly of nervous investors - have turned the spotlight on some of these funds. And this is exactly what leads us to check out this segment today.

Let us, for starters, refer to a typical small- and mid-cap fund: Sundaram S.M.I.L.E. (the abbreviation stands for `small and medium Indian leading equities'), which has been around for the past two years. The last time we checked, this had a formidable portfolio made up of over 70 stocks, accounting for about 97 per cent of its net assets. Clearly, it has been able to cover a very wide range of sectors.

Allow us to also go across to Pru ICICI Emerging S.T.A.R. Fund, which has lately seen some consolidation in the portfolio, thanks to the fund manager's decision to exit certain small positions. This has allocations to well over 50 stocks.

How have these funds performed? The Sundaram fund is perhaps not too well placed on that front. As on January 31, its one-year annual returns (25.39 per cent) trailed the benchmark BSE 500 (35.05 per cent). The Pru ICICI fund has fared better; its benchmark, however, is the Nifty Junior. It may be mentioned here that Sundaram MF has now changed the fund's benchmark to S&P CNX Midcap. For more, check out the fund house's last fact sheet.

The point that may be noted is that small- and mid-cap plays have their own foibles, their weaknesses that cannot just be wished away. At times they are constrained by a relative lack of liquidity. Sometimes they are a bit under-researched too.

Fund managers say they are well aware of these aspects. However, as some of them vehemently add, there is no point in staying away from this segment - not when the going is generally good and most of the stocks in question have a definite chance of advancing.

Quite a few funds with a clear mid-cap focus were launched in the past year, adding to what was becoming a trend. This seems to have slowed down for the time being. However, some experts do suggest that the slow-down is just temporary. Acorns, as they agree to what we said at the very beginning, do have the chance to become giant oaks!

Investors who look for variety may want to know more about smaller-cap options, particularly when they feel the need to supplement their large-cap oriented fund holdings. The world of small-caps is changing incessantly; the trick is to find the right opportunities amidst these never-ending realignments.

Feedback may be sent to nilanjan@thehindu.co.in

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