Mutual Funds

Diving into the mid- and small-cap pool

Bhavana Acharya | Updated on November 16, 2013

Risky fare



New highs! Well, yes, if the Sensex is considered. But it is not quite so for mid-cap or small-cap stocks, which have lost ground instead. From January this year, the CNX Midcap and the CNX Smallcap index have lost 14 and 21 per cent. That’s quite the difference from the Nifty, which is flat in the year to date. Over the longer timeframe too, mid- and small-caps are worse off. The two indices are 21 and 49 per cent below their 2008 levels, even as the bellwethers clawed their way back up.

Opportunities now

True, small-cap and mid-cap stocks have had far more troubles with governance than their larger peers. Earnings of these companies too have faltered, and are less stable than established, large companies. Heavy debt and higher interest rates, lesser ability to wrangle better deals from suppliers, lack of pricing power to pass on hikes are just some of the factors affecting earnings. These stocks also have lower liquidity.

The CNX Midcap index’s valuations dived from 18 to 13 times between the start of the year and now. Its five-year average is at around 16 times. The correction could thus offer a good investment opportunity in mid-caps and small-caps now.

But not all mid- and small-cap stocks lend themselves to investments. Those that are at deserved lows need to be avoided. Picking fundamentally sound companies and timely churn are important when it comes to investing in smaller-capitalised stocks. It is suitable only for investors with a high risk appetite. Two new funds riding on this theme are open for subscription now.

Axis Small Cap Fund

This fund will invest at least 80 per cent of its portfolio in stocks within the market capitalisation range of the CNX Small-cap index, which is its benchmark. In picking stocks, the fund will look at those which have sustainable business models and a competitive advantage. This suggests that a growth-based investing style will most likely be followed — low stock valuation may not be the defining criterion.

The fund has a five-year lock-in, which could be helpful since it won’t have to contend with investors pulling out based on short-term performance. It may be easier to hold stocks for a longer time to ride out the volatility inherent in small-cap stock prices.

But this lock-in makes the fund suitable only for those who can take higher risk and who won’t be in need of cash in the near future.

The fund is a new theme from the Axis stable. But its other funds have been good and consistent performers, even if they have a short track record.

Axis Equity, for instance, is in the top-quartile for large-cap funds in the one and three-year timeframes.

Axis Midcap, started in February 2011, has beaten its benchmark hollow in the one-year period though there are peers who have done much better. Axis Small Cap will be managed by Pankaj Murarka. The NFO closes on November 25.

Pramerica Midcap

An open-ended scheme, Pramerica Midcap Opportunities will invest at least 65 per cent of its portfolio in mid-cap stocks — those in the capitalisation range of the CNX Midcap index. Small-cap and large-cap stocks can make up the balance. It can take cash and debt calls as well, to the extent of 35 per cent of the portfolio.

The fund aims at investing in fundamentally strong companies where there is scope for value unlocking.

While this may narrow the range of stocks it can invest in, it could ensure that it stays away from momentum-driven picks.

This is, however, only the second pure equity fund from Pramerica, which has more debt funds to its credit, some of which are doing well.

Pramerica Large-cap Equity, started in December 2010, has underperformed its benchmark Nifty for most of this time.

The fund will be managed by Brahmaprakash Singh for the equity portion and Mahendra Jajoo for the debt, if it is invested in. The NFO closes on 25 November.

Published on November 16, 2013

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