The Hindu Business Line : Sundaram Select Mid-Cap: Hold

INVESTORS in this fund can retain their holdings despite a sharp run-up in its NAV. With the bullish phase still showing strength, mid-cap stocks appear to hold potential upside. The NAVs of Sundaram Select Mid-Cap Fund are Rs 25.1 (Growth Option) and Rs 15.6 (Dividend Option)

Business Line had recommended partial profit-booking in the last week of September 2003 to capitalise on the surge in the prices of mid-cap stocks. The fund has continued to perform well, outperforming its benchmark, the S&P CNX Nifty Junior, comfortably. The NAV has more than doubled in past year.

The fund has posted annual returns of about 90 per cent since its launch in July 2002. A well-timed launch enabled it to catch the rally in mid-cap stocks at an early stage. It has pursued an aggressive strategy in stock selection. But in keeping with Sundaram Mutual Fund's track record, exposure levels in individual stocks have been kept at less than 5 per cent.

Had the fund ramped up holding levels in stocks that figured in the top holdings over the past six months, the returns may have been higher. This cannot be brushed aside as the fund's strategy of keeping exposures to individual stocks at low levels has not necessarily reduced the risk element. Its portfolio points to a fairly high degree of momentum-based investing, which pegs the risk at a higher level.

Suitability: The fund is appropriate for investors with a high appetite for risk. Investors with lower risk-tolerance who wish to add a dash of mid-cap exposure to a predominantly large-cap portfolio can contemplate exposures in the fund.

However given the sharp spurt in prices, it may be better to take exposures in a phased manner, perhaps through the systematic investment plan. Investors can stay with the dividend option due to its superior tax efficiency (dividend is tax-free) at least till March 2004.

There is also a significant change in the fund's asset base, which has risen six-fold since its launch, with a sizeable part of accretion taking place in November. The degree to which the fund can replicate its impressive performance on a larger asset has to be closely tracked. On incremental flows, it may be difficult to for the fund to generate returns of the magnitude that it has managed over the past 18 months.