Mid, small-cap funds fall but beat benchmarks

Sneha Padiyath Mumbai | Updated on November 10, 2017


Balanced spread across sectors seems to have helped

Of the 68 mid- and small-cap mutual fund schemes, 63 were able to beat the mid- and small-cap indices in the short-term when both these indices stumbled as the markets were falling.

In the last three months, the mid- and small-cap indices have slumped 18 per cent and 20 per cent respectively. Schemes focussed on mid- and small-cap stocks have given returns in the range of negative 7.3 per cent and negative 23.7 per cent.

While the schemes themselves have given negative returns, they have managed to beat the indices.

“The broader market has also become negative, so obviously the small- and mid-cap indices have been affected. What typically happens is that when the market gets nervous, investors get out of the small- and mid-cap stocks due to liquidity, safety and transparency issues,” said Mr Kaushik Dani, Fund Manager-Equity, Peerless Funds Management Company.

The top five funds to outperform the indices are ICICI Prudential Discovery Inst I, ICICI Prudential Discovery, Reliance Small Cap, Tata Dividend Yield and DSPBR Focus 25.

It is interesting to note that the first three funds have a balanced spread of their portfolio across all sectors.

The average investment across the top-10 sectors of ICICI Prudential Discovery Inst I, ICICI Prudential Discovery is 7.86 per cent, while that of Reliance Small Cap is 4.54 per cent.

These sectors include the financial, healthcare, metals, energy, services, FMCG, technology, chemicals, construction and engineering sectors.

While the percentage allocation is different for each fund in the scheme category, the sectors remain the same.

“This is nothing but a correction in the bull market. The mid- and small-cap indices had outperformed the large-cap index in the beginning of the year,” said Mr K. Ramanathan, Chief Investment Officer, ING Investment Management.

“Over a longer period of time, these stocks will perform better. The ‘alpha' generated will be higher.”

A positive alpha is the extra returns a fund manager generates through better stock selection and performing better than or matching the benchmark.

Fund analysts now believe that the way ahead for fund managers would be expert stock selection.

Fund managers would now have to identify the right stocks in the right sectors as even in a falling market there will be good quality stocks.

However, for now, the possibility of a further drop of 5 per cent in the mid- and small-cap stocks in the short term cannot be ruled out, say analysts. “Right now what the investor needs to do is look at a long-term horizon and stay invested in these schemes for the next two-three years,” added Mr Dani of Peerless Funds.

Published on February 02, 2011

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