In our view, you should go in for mid-cap oriented funds only if you already have other equity investments in your portfolio. If you own funds, your existing funds should either focus on large-cap stocks or follow a flexicap approach to investing. Given that mid-cap stocks, by their very nature, offer volatile returns, they are not well suited, either to first-time or to risk-averse investors. Assuming that you do have other such funds in your portfolio and thus would like to add mid-cap funds to it, we suggest you keep the following factors in mind.

As mid-cap stocks tend to be quite volatile as an asset class, we believe that it is important for investors to select mid-cap funds based on a performance record that spans an entire market cycle. Therefore, we would not advise you to go in for mid-cap funds that are either in their NFO period or have been floated over the past two years.

On the other hand, given that the category itself is quite new, there are very few mid-cap funds in the Indian context that have displayed a consistent track record for five-year periods or more. Funds such as the Franklin India Prima, which have such a good long-term track record, have under-performed their peer group over the past year. (Refer to article on mid-cap funds in Business Line edition dated July 1).

Keeping the above factors in mind, we would suggest funds such as Birla Midcap Fund, Reliance Growth and Magnum Global for your portfolio. The last two are not pure mid-cap funds, but do invest a lion’s share of their portfolio in mid-cap stocks. We have suggested you include these in your portfolio because of their track record in the past year as well as over a five-year period.

Taking the systematic investing route to these funds appears to be a good strategy. When you invest in mid-cap funds, you have to be prepared for the possibility of a sharp dent in your investment value during bearish periods or sharp corrective phases in the market.

From a macro perspective, after the secular run-up in the frontline stocksit is the mid-cap space that currently offers reasonable investment opportunities at more moderate valuations. Therefore, an investment in mid-cap-oriented funds at this juncture has the potential to deliver reasonable returns over the long term. However, you should remember that value unlocking for mid-cap companies takes a relatively long period to materialise. A five-year investment horizon is a must if you would like to reap benefits from investing in mid-cap funds.

AARATI KRISHNAN

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