When the going gets tough, the stock market usually marks down smaller companies and prefers safer blue-chips. CNX Midcap Index has shed nearly 15 per cent in value since January this year, even as bellwether indices Nifty and Sensex gained 2 and 5 per cent, respectively, during the same period.

This may be a good opportunity to buy into promising smaller companies at attractive prices. Franklin Templeton India Smaller Companies Fund is a scheme that has performed well over the past few years.

The fund has managed to consistently outperform its benchmark, CNX Midcap, across one-, three- and five-year time-frames.

It has delivered 18 per cent gains since January 2011, compared with a decline of over 11 per cent in the CNX Midcap Index. Investments can be considered in the scheme with a three- to five-year investment horizon. The fund’s mandate is to invest predominantly in stocks with market capitalisation lower than the 100th stock in the CNX Midcap Index. This makes the fund more suitable for investors with higher risk appetite.

The fund has managed to outrun its peers — UTI Midcap, DSP BlackRock Small and Midcap Fund, ICICI Pru Midcap Fund and Kotak Midcap over one-, three- and five-year time periods.

Quality portfolio

Prudent cash calls have helped the fund stay ahead of competition even during corrective phases. For instance, the fund managed to raise its average cash position to 10 per cent levels, well ahead of the market correction which took place November 2010 onwards.

This has helped the fund keep the downside to 31 per cent during November 2010-December 2011, while the CNX Midcap lost over 37 per cent during the same period. The addition of stocks such as GMDC, VST Industries, Gateway Distriparks and Amara Raja Batteries to the portfolio aided its performance during that period. Similarly, during the rally which began in December 2011 and lasted up to January 2013, the fund clocked 51 per cent gains.

This is much higher than the 36 per cent jump in the CNX Midcap Index. Higher exposure to banking, auto component makers and cement producers lifted its NAV performance. Also, increasing exposure to select stocks such as Berger Paints, Amara Raja Batteries, Supreme Industries and TV18 Broadcast helped this.

The fund has demonstrated an ability to consistently outperform. In the last five years, its one-year performance has been better than the benchmark 73 per cent of the time. The fund held 42 stocks in its portfolio at the end of September, with a weighted average market capitalisation of over Rs 8,000 crore.

The fund seems to be betting big on financials as a theme currently. Though rate tightening measures by the RBI, if any, may have a bearing on these stocks in the short term, the fund may benefit from trend reversals in the medium to long term. Exposure to pharma and IT may cushion the fund from downside risks in choppy markets.

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