The Hindu Business Line : Mid-cap funds and volatile market

Imagine a fund that has well over 100 stocks in its portfolio. Imagine a fund manager who has to fit in all those efficiently day after day, all the time making sure that the portfolio is not too unwieldy.

Chances are that the fund in question is heavy on mid- and small-cap stocks. Chances also are that its unit holders are frequently on tenterhooks, given the kind of volatility that the universe of mid- and small-caps witnesses.

"I don't mind the volatility", did you just say? Well, just for the record, volatility is simply the norm here, there is no escape from it. NAVs of funds made up predominantly by these stocks have bobbed up and down far too wildly, reflecting the state of things on this front. The mid-cap index has been fairly quirky too.

Funds' strategy

In a situation like this, how are the mid- and small-cap funds poised? Let's look up a few individual players. Take, if you like, Sundaram MF's Select Midcap. Now, this is a fund that has been around since the last five years or so - actually it is among the oldest of its kind - and has a large portfolio with more than a hundred bits and pieces in it. Not surprisingly, not many of these account for more than one per cent of the net assets. Sundaram's latest fact-sheet underlines the fund manager's move to step up exposure to banks, media and energy. It also mentions enhancement of allocations to `higher-end mid-cap stocks'.

Let's also check the newly-launched DSP Merrill Lynch product, which appears to be rather different, with far fewer stocks under its wings. The investment style, therefore, is set apart from what is followed by Sundaram. Several stocks contribute over 3 per cent of the net assets. There are sizeable allocations to sectors like services, tech, metals and chemicals.

A somewhat similar strategy is followed by Kotak Mahindra Mutual Fund's mid-cap fund, which has puts its faith in engineering, metals and services.

Can a fund really do justice to the many small bits and pieces it chooses to invest in? "Doable", some claim. "Not impossible", others try to be a tad more moderate. Still others dub the exercise as futile. And that is a debate that will go on and on.

Whether you are in the thick of that debate or out of it, you will need to check the pros and cons of investing in mid/small cap funds. (Mind you, not all funds with a mid-cap bias come with a handy mid-cap tag. In many cases, names can be generic). As everyone points out, the stocks here often face an absence of enough liquidity. Many of these are not researched as well as their large-cap counterparts. (This, we hear, is changing, thanks to securities broking outfits that are steadfastly researching mid-caps these days). In some cases, there is simply not enough information about the companies in question.

We will, perhaps in another column, take a look at the assets that mid-cap funds have been managing. We will also look for trends - whether AUMs have been rising or depleting. What needs to be seen whether the funds that have better performance to their credit have been actually able to attract more money than the others in the peer group.

That will lead us again to a simple, time-tested truth: Fund managers who have performed better are ultimately rewarded by investors. We rest our case.

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

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