The Hindu Business Line : Fund Talk

I am an NRI and actively invest in mutual funds. I am currently investing Rs 10,000 each in the following funds through the SIP route: Magnum Contra, HDFC Equity, Reliance Growth and Franklin Flexi Cap. I can afford another Rs 20,000 per month and am deciding upon the funds where I should be investing. My investment horizon is around 10 years and I am not averse to taking risks. The market trend has been such that the asset size of the majority of good mid-cap funds has swelled. The performance of some of these funds has suffered and this does seem to be a cause of worry. Considering that I do not want to alter the existing portfolio, could you suggest couple of potential performers?

Sanjeev Suri

The diversified equity funds you own carry good credentials and boast a consistent performance track record. You've made good choices there! From your question, we infer that you would now like to add new funds, if possible with a mid-cap bias, to your portfolio. We understand your dilemma about mid-cap funds. Given that the asset class tends to be quite volatile, we feel that only mid-cap funds with a long track record — those that have delivered consistent results through both bull and bear phases — should merit consideration. However, there are just a couple of mid-cap funds in the market (Sundaram Select Mid-cap and Franklin India Prima) that have more than a four/five year track record and these have a large asset base (Rs 2,000 crore and Rs 1,700 crore respectively).

Size can certainly be an impediment to performance in the mid-cap category, given the limited depth in the Indian market. Large transactions in under-researched stocks can distort prices. This being the case, a large-sized mid-cap fund has to either assume higher impact costs and liquidity risks to stick to its mandate; or perforce migrate to larger mid-caps, where such risks are lower. Either course of action may dilute the fund's returns. This is particularly true during volatile or uncertain market phases, such as the one we are currently witnessing.

Keeping the above factors in mind, we have been recommending that investors add to their portfolios diversified equity funds that follow a flexi-cap investment style or those that feature a sizeable mid-cap exposure, to benefit from the growth potential of mid-cap stocks. Given that you have a 10-year investment horizon and assuming you do have a high-risk appetite, we would suggest funds such as Magnum Global Fund, Magnum Multiplier Plus, Franklin India Opportunities Fund and Franklin India Prima Plus, apart from HDFC Equity Fund (which you already own) as supplements to your portfolio.

These funds are not mid-cap focused funds but nevertheless feature a sizeable mid-cap exposure, by virtue of their investment objectives. The benefit of owning these funds is that the fund manager will take the call on your behalf, on when and how much of the portfolio, should be invested in mid-cap stocks.

Aarati Krishnan

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