Mid- and small-cap stocks have received a body blow over the past few months, with foreign institutional investors in the ‘sell' mode and investors turning quite risk-averse. Concerns that rising input costs and interest rates will hurt smaller companies the most have battered the valuations of such stocks to discounted levels. This makes it a good time to buy equity funds focussed on the small- and mid-cap segments of the market.

Religare Mid N Small Cap Fund has proved quite adept at navigating this risky space and finding stocks that can contain volatility. Investors can consider adding this fund's units in small lots to their portfolio. However, given its limited track record, this fund need not be your core portfolio holding.

Having made its debut in the still upbeat markets of March 2008, this fund has managed to beat both its benchmark (the CNX Midcap index) and a number of peers in the mid-cap space since inception. The fund's returns since inception stand at a reasonable 14 per cent, despite this being a very challenging phase for mid and small-cap stocks.

An annualised return of 14 per cent over a three-year and one-year time frame has placed the fund in the top quartile, even as most other funds in the mid-cap category have managed only a single digit return. Religare Mid N Small Cap has also navigated the recent market decline quite well, getting away with a 12 per cent NAV decline, even as the CNX Midcap index, the fund's benchmark lost 17 per cent of its value.

Portfolio

The fund's decision to tilt its portfolio towards FMCG stocks (20 per cent of assets in April 2011) has worked in its favour in recent months, as they have proved more resilient to interest rate and input cost pressures. Within the media space, the fund has preferred vernacular print names such as Jagran Prakashan and DB Corp, which again represent a safer play on the consumption theme.

Over a six-month period, the fund has substantially trimmed positions in NBFCs (Manappuram General Finance), industrials (JMC projects, Bosch), which has probably worked well for the fund. The portfolio has stuck strictly with the small and mid-cap mandate, with over 75 per cent of the portfolio by value invested in stocks with market cap of less than Rs 10,000 crore.

The fund's tiny size (assets of Rs 14 crore by end April 2011) has proved to be an advantage given the mid and small-cap theme. The small size allows the fund to pick up stakes in offbeat small and mid-cap companies without being dogged by liquidity issues. It may also help the fund nimbly manoeuvre its portfolio to build or liquidate positions within a short span.

Despite the small size though, the fund's portfolio is extremely diversified, featuring 45-50 stocks at a time with no more than a 4 per cent holding in a single stock. This strategy, combined with its diverse sector profile, has probably aided the fund in containing damage to its NAV during the recent carnage in mid and small-cap stocks.

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