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Suresh Parthasarathy

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Mid-cap stocks and funds that focus on them have taken a sizeable hit during the recent market meltdown.

Given the many macro risks to company earnings and the uncertain picture on liquidity, the risks to investing in mid-cap stocks also have gone up.

In this environment, investors looking to contain volatility in their portfolio should switch to large-cap oriented funds with a good track record.

One of the earliest mid-cap funds to be launched, Franklin India Prima Fund, an open-ended mid-cap fund with a long track record, has seen a sharp downswing in returns over the past one year.

The fund’s three year annualised return stands at about 7 per cent now, placing it below mid-cap oriented peers such as Sundaram BNP Paribas Select Midcap and Magnum Midcap Fund. The fund has also underperformed its benchmark by a significant margin.

If Franklin India Prima Fund forms part of an investor’s core portfolio, it may be advisable to move out of the fund to large cap funds such as DSPML Top 100 or Birla Sun Life Frontline Equity, as both have a good long term track record and may be better placed to contain volatility.

Performance: Franklin India Prima’s five-year annualised returns stood at around 29 per cent as on July 17, marginally ahead of the CNX 500 returns of 28 per cent for the same period.

The fund’s three-year CAGR at 7 per cent, however, significantly trails the CNX 500 (17 per cent). The fund’s NAV has declined 48 per cent on a year to date basis, against the 41 per cent fall in the CNX 500.

The fund has, however, contained the downside better over the past two months. A positive aspect of the fund is that it does not take cash calls, unlike a few of its peers. The fund has stayed almost fully invested in equities amidst this correction and has resisted the temptation to move into cash.

This may help it participate more quickly in any recovery in mid-cap stocks, as a reversal in the market can be quite difficult to predict.

Portfolio: The fund has 59 stocks in the latest portfolio. It has adhered quite closely to its mid-cap mandate and close to 75 per cent of the assets were invested in stocks with market capitalisation less than Rs 7,500 crore.

In the past six months, the fund has increased the asset allocation to interest rate-sensitive banking sector. This could partially explain the underperformance, as banking stocks have taken a sharp hit in the recent meltdown.

The fund’s asset base, which stood at about Rs 1,700 crore in December 2007 has declined to Rs 790 crore levels by end-June, driven both by a decline in NAV as well as net outflows.

Given that a large asset base is a constraint when it comes to managing a mid-cap portfolio (given liquidity constraints on these stocks), the smaller asset size may permit greater manoeuvrability of the portfolio.

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