The Hindu Business Line : HSBC Midcap Equity Fund: Hold

Mid-cap stocks have staged a strong recovery over the past six months, outpacing the frontline stocks. Keeping up with this trend, equity funds focussed on mid-cap stocks also recorded a sharp improvement in returns. HSBC Midcap Equity Fund, launched two years ago, is among the strong performers. The fund delivered a 42 per cent annualised return since launch, against a 37 per cent return on the BSE Midcap index — its benchmark. The fund does not as yet have a track record over a complete market cycle. However, it has handled the volatile market of the past two years well. Hence, investors can consider the fund as a diversification option.

Suitability: Mid-cap funds are usually best suited to aggressive investors, given their inherent volatility. A fairly long investment horizon of about five years is also required, as mid-cap stocks usually require a longer incubation period than large-caps. Within the mid-cap universe, HSBC Midcap Fund carries a moderate risk profile. It has managed to contain the downside in its NAV to levels very close to that of its benchmark — the BSE Midcap index — and is a middle-of-the-roader, when evaluated on risk-adjusted measures.

Performance and strategy: Since its launch two years ago, HSBC Midcap Fund has turned in an investment performance that compares well its peers in the mid-cap space. With absolute returns of over 100 per cent since inception, the fund has outpaced the BSE Midcap Index (88 per cent) as well as mid-cap funds such as HDFC Capital Builder and Franklin India Prima. The fund's six-month and one-year records also show it to be above the category average for mid-cap funds. Apart from picking quality stocks in the mid-cap space, the fund appears to contain risk by restricting its stock specific exposures to less than 4 per cent. The portfolio features about 40-50 stocks, with a wide sector spread.

The fund also casts its net fairly wide in stock selection, with holdings from under-researched sectors such as chemicals (Gulf Oil), glass (Asahi India) and airlines (Spicejet). In recent months, mid-sized IT companies, media and auto components have been the key sector choices.

One factor that distinguishes the fund is its strict adherence to its label. Over three-fourths of the portfolio has consistently been invested in stocks with a market capitalisation of less than Rs 5,000 crore and the fund has seldom taken recourse to large-cap stocks in recent months.

The fund's size of Rs 303 crore as of May 2007 is also an advantage. The medium size allows sufficient manoeuvrability of the portfolio not available to really large mid-cap funds. At the same time, a good spread of stocks and sectors provides enough diversification.

Fund facts: HSBC Midcap Equity Fund was launched in May 2005. The fund manager is Mr Mihir Vora. The current NAV of the Growth option is Rs 21.5 per unit.

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