If the economy were to revive, which are the stocks you would bet on?

Granted, a recovery in GDP growth, from little below 5 per cent in 2013-14 to about 5-6 per cent in 2014-15 per cent will benefit the broad market. But it will be the small-cap and mid-cap companies, the worst hit during the slowdown, that have the potential to grow much faster.

Keeping this in mind, two fund houses have come out with a new fund — Birla Sun Life Emerging Leaders Fund- Series 1 and L&T Emerging Businesses Fund. Both funds will invest in small- and mid-cap companies that have the potential to grow at a higher rate when the recovery kicks in. But the small- and mid-cap space has been especially capricious in the past six years. Thus, only investors with a high risk appetite should consider such funds.

Both the funds are closed-ended, which adds to the risk since exits in case of poor performance may not be easy.

Small-cap focus L&T Emerging Businesses Fund is a two-year close-ended equity fund that will invest at least 50 per cent of its portfolio in stocks of small-cap companies whose market capitalisation is beyond the range of the top 200 companies. This means the fund will invest in companies with an under ₹3,000-crore market cap. Hence, the fund is benchmarked against the S&P BSE Small Cap Index. The balance will be parked in other equities, including foreign equity, or debt and money-market instruments.

The BSE Small Cap Index has delivered 6 per cent annual return in the last five years, and with a great degree of volatility. In 2009-10, it was up 45 per cent and then proceeded to lose over 40 per cent in 2011. In the last one year, the index has delivered a 27 per cent return.

Other funds in this category, such as the SBI Small & Mid Cap Fund and Reliance Small Cap Fund, have outperformed the benchmark. But here too, the returns have been volatile. The fund will be managed by SN Lahiri, Rajesh Pherwani and Abhijeet Dakshikar. SN Lahiri also manages the L&T Midcap Fund, and L&T Equity Fund, among others.

The offer closes on May 6.

Mid cap focus Birla Sun Life Emerging Leaders Fund, a three-year close-ended equity fund will invest 70-80 per cent of its portfolio in small- and mid-caps, and the balance in large-cap companies. But here, the focus will be on the mid-cap space; ideally, companies with a market cap of ₹1,000-5,000 crore. But this will be within the broader Mid Cap Index stocks, where the market cap can go up to ₹16,000 crore. The fund is benchmarked against the S&P BSE Midcap Index and will close on April 30. The fund will be managed by Hitesh Zaveri, who also manages the Birla Sun Life Small & Mid Cap and Birla Sun Life Mid Cap. Both the funds have beaten the benchmark, but lag peer funds in the category.

The BSE Mid Cap Index has also been volatile. Annual returns in the past five years have been 8 per cent. In 2011 and 2012, the index gained and lost in equal measure. In the last year, the index has delivered 17 per cent return.

Franklin Templeton Smaller Companies Fund, the top performer in this category, delivered 28 per cent returns annually in the last five years.

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