The Hindu Business Line : Fund Talk

I have started SIP in Sundaram Select Midcap with the notion that mid-caps are undervalued. I have invested aggressively with hope of high returns. How would you rate my tilt towards Sundaram Midcap? Are mid-cap funds poised to perform better? My current investments — Fidelity Tax Saver, Reliance Tax Saver, HDFC TaxSaver, Franklin Flexicap, Reliance Vision, Reliance Growth, Franklin Prima, Templeton Equity Income, Magnum Contra — constitute 55 per cent of my investments. The rest is being invested in Sundaram Select Midcap now through SIP. I have invested through SIP to even out the ups and downs. What should be my ideal portfolio, considering that I am 28 and want quality funds in my portfolio? I plan to invest all my funds in next six months in Sundaram Midcap. I can remain invested for three years.

Vikram Choudhary

Sonipat

The valuation gap between large-cap and mid-cap, stocks has, indeed, widened with the recent correction. Picking the right mid-cap stocks today could deliver superior returns over the long term and so every investor with a moderate risk profile should consider having one or two mid-cap funds in their portfolio. But in building aggressive positions in mid-cap funds you need to be aware of the higher risks involved in your strategy.

For one, mid-cap stocks carry inherently higher risks than large-cap stocks. In volatile markets such as this one, investors prefer to stay with safe-haven large-caps and will not think twice in shedding mid-cap stocks — even if they are quality stocks that trade at attractive valuations. This is what happened in the correction in May and June, when all mid-cap stocks took a pounding. Several mid-caps still trade at levels 30 per cent below their peaks, even though large-caps have recovered from their lows.

Second, it may take longer than you expect for the valuation gap between large and mid-cap stocks to be bridged. Going by the manner in which you are increasing your holdings in mid-caps, you appear to believe that the re-rating of mid-caps is imminent. Large-cap stocks could well correct, but surplus liquidity may not immediately flow into mid-cap stocks. If you are convinced about the mid-cap story, it makes sense to hold on to mid-cap funds, with a time horizon of at least for two-to-three years, if not longer. As mid-cap valuations also appear to be more reasonable, the downside in mid-cap funds at this point in time may be lower than large-cap ones.

Even if you have a long-term horizon, however, investing more than half your portfolio in mid-cap funds sharply enhances the risk profile of your fund. If you have an aggressive risk appetite, a 40 per cent allocation to mid-cap funds is reasonable. However, choosing to put 45 per cent in a single mid-cap fund is not. Your conviction in Sundaram Midcap is understandable, as the fund has turned in an exemplary performance over the past year. However, it would be prudent to invest not more than 15 per cent in a single fund, no matter how good its performance. No fund can sustain its outperformance forever and investing such large sums exposes your portfolio to concentration risks.

Because all your investments in equity are through funds, it makes sense to hold a more diversified portfolio than is the norm. If you wish to have a large allocation to mid-cap funds, you can hold two or three mid-cap funds. True, there are few mid-cap funds that look promising when you look at their dismal performance over a one-year period. But you can still perk up your returns by choosing diversified funds that invest in a blend of large-cap and mid-cap stocks, such as Franklin Opportunities or HDFC Core and Satellite.

You can invest in multi-cap funds, in which case, you do not have to take a call on whether mid-caps or large-caps will do better, as the fund manager will do it for you. If you have not already locked in on your SIP in Sundaram Midcap, you could consider adding to your holdings in Franklin Flexicap and Reliance Growth. You can switch a part of your holdings in Sundaram Midcap to Sundaram Growth or Sundaram Tax Saver to ensure that it does not account for more than 15 per cent of your overall portfolio.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

Shanthi Venkataraman

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