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Aarati Krishnan

AFTER hovering in the shadow of its better performing counterparts until 2002, the HDFC Capital Builder Fund has outpaced the majority of its peers over the past six months. The fund's focus on mid-cap and small-cap stocks with low valuations appears to have boosted its performance.

In 2003, the fund shed its focus on "defensive" sectors such as FMCG and pharma and has since focused mainly on mid- and small caps. The portfolio now has a distinct cyclical bias. Investors in the fund may hold, in light of its recent good performance. But fresh investments can be contemplated after watching its performance over a complete market cycle.

Suitability: With its strong bias towards small and mid-cap stocks, the fund may carry higher risks than would a diversified equity fund focussed on large-cap stocks. Mid-cap and small-cap stocks typically come with higher levels of volatility and lower liquidity than large-caps.

In its earlier avatar as a "defensive" fund packed with FMCG and pharma stocks, the fund provided protection against downside risk, with limited return potential. With the recent shift in strategy, the fund's portfolio is constructed to deliver much higher returns, but comes with a higher risk profile.

Performance: After trailing diversified equity funds such as HDFC Top 200 Fund and HDFC Equity Fund until the middle of 2003, HDFC Capital Builder has edged ahead of these funds over the past year. Its one-year returns at about 70 per cent, are superior to that of HDFC Equity (52 per cent), and HDFC Top 200 Fund (54 per cent).

The fund has handled the correction in stock prices over the past quarter very well, losing much less value than many of the other diversified equity funds. The fund's focus on undervalued mid-caps stocks and dividend yield candidates appears to have provided protection against the downside in the markets.

The fund's performance over three- and five-year time-frames continues to lag that of HDFC Top 200, HDFC Equity and a few other top-performing diversified funds. But given the significant change in the fund's investment strategy, this record may not be wholly relevant.

The fund holds a very diversified portfolio, with construction, pharmaceuticals, commodity chemicals being the top sectoral exposures.

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