IDFC Small and Midcap Equity: Invest

It has not been an easy ride for mid-cap funds over the last three years, with stocks in this market capitalisation category underperforming large-caps significantly. In fact many a mid-cap fund's five-year track record has taken a hit as a result of continuing underperformance since the 2008 correction.

However, there are a few good mid-cap funds that not only beat the bellwether index S&P CNX Nifty but also matched multi-cap fund performance. The wide valuation gap between large and mid-caps stocks provides an opportunity to play the mid-cap theme through select good funds.

IDFC Small and Midcap Equity is one such fund. Over a three-year-period, the fund clocked a compounded annualised return of 22 per cent and bettered its benchmark CNX Midcap by 18 percentage points as well as the consistent top performing multi cap fund HDFC Equity by six percentage points.

We believe a mid-cap fund has to demonstrate this kind of substantial out-performance for the kind of risk it comes tagged with. The fund became open-ended (from launching as a close-end fund) in September 2009, well ahead of its original plan to open up in March 2011 and still proved its mettle in the volatile market starting late 2010.

Suitability : The fund is suitable only for investors with high risk appetite and long-term investment horizon of three-five years. Adept profit-booking strategy in exceptional rallies would also be required. With the high interest rate regime currently seen, small and mid-cap companies will find it difficult to pass on costs while maintaining market share.

The debt burden too could be an issue. On this account, IDFC Small and Midcap has been prudent in its sector choice placing higher weights to cash-rich industries such as FMCG. Over the past few months it reduced exposure to interest-sensitive sectors such as banks and auto. However, the portfolio would still not be immune to interest rate-related issues. Hence, volatility may prevail. Investors would therefore do well to take the SIP route.

Performance : Over a year the fund clocked an absolute return of 8 per cent and bettered its benchmark by 7 percentage points. However, over the last six months, when markets have struggled to move forward, the fund's NAV was down 9.5 per cent containing declines better than most mid-cap funds.

Thanks to 40 per cent of the assets being allocated to stocks with market capitalisation above Rs 7,500 crore, the fund managed to contain declines better than most peers.

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