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Sunday, Jul 17, 2005

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It is mid-caps for the long term

Aarati Krishnan

MID-CAP stocks have been lying low in the recent times after racing ahead of large-caps over the past couple of years. Many experts also caution about their high valuation levels. So how should an investor allocate his money between large and mid cap stocks?

Mr Siva Subramanian cautions that he can offer no readymade prescription that fits all investors, as this will depend on one's risk profile. But he believes that mid-cap stocks are likely to outperform large-caps over a long investment period of say, 10 years or more.

Responding to a query on the relatively higher valuations of mid-cap stocks at this juncture, he explains: " We do advise caution in the mid-cap space right now, because they are more expensive than large-cap stocks. But I do believe that over a long period of time, say, a 10-year period, if you hold a basket of mid-cap stocks, they will tend to outperform large-cap stocks. This has been proved globally, across several markets".

He points out that the Indian market has so far been an exception to this trend, but this is changing. "Since inception, the Prima Fund (which invests in mid-caps) has underperformed the Bluechip Fund (a large-cap fund). But over the past three years, the Prima's outperformance has been substantial. In the initial phase, the liquidity in mid-cap stocks was limited. But now, there is enough and more money looking to invest in the mid-cap space."

Is it true that you need to churn your portfolio quite often, if you hold mid-cap stocks? Not necessarily, says Mr Siva Subramanian. " If you look at our large positions in the Prima Fund, these stocks have been held for three or four years now. We may have a small trading position in a few of the stocks, but that is not the main intention of this fund."

But he does admit that the appreciation in a mid-cap stock, at times, catches even the fund management team by surprise.

"Of late, in the mid-cap space, you buy stocks with a certain view on price, but find that the appreciation happens much sooner than you expected. In such cases, we do book profits".

Given the return potential from mid-cap stocks, has it now become imperative for an investor in the Bluechip Fund to diversify? "The answer to that will differ from investor to investor. The Bluechip Fund is suitable for a conservative investor looking for low volatility", he says. But he feels, there will be periods when mid-caps do better than large-caps and vice-versa. To address this, he suggests that an investor should build his core portfolio around a pure diversified fund that can invest anywhere, without any restrictions on market cap.

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