IDFC Sterling Equity: Invest

With the markets still reeling under volatility, mid- and small-cap funds are only for the brave hearts and those with a long-term investment horizon.

That said, the valuation gap between the large and mid-cap stocks means a superior return opportunity in the latter space, when the market tide turns.

For those seeking to take exposure to this space while limiting their risks to some extent, IDFC Sterling Equity (formerly IDFC Small and Midcap Equity) is a good option.

The fund, over a three-year period, delivered compounded annual return of 38 per cent and bettered its benchmark CNX Midcap by four percentage points and outpaced the multi-cap category average by nine percentage points.

With a slightly higher holding of large-cap stocks in recent times (post a change in fund name), the fund can replicate this kind of returns only through actively churning its portfolio.

But to its credit, the fund also contained declines better than large-cap index CNX Nifty, even as a mid-cap fund. The fund was launched in March 2008 during the market crash. In that calendar year, it lost 26 per cent even as Nifty shed 41 per cent.

Performance: The fund clocked 5 per cent over a one-year period and outpaced S&P CNX Nifty and category average by eight and five percentage points, respectively. It managed to achieve this feat despite toning down exposure to the FMCG sector. Although the fund's beta, a measure of volatility against the benchmark, is quite low, volatility will still prevail due to its exposure to mid- and small-cap stocks.

Investors, therefore, would be better off accumulating units in the fund through SIP.

The fund appears in the second quartile of the performance chart of mid-cap funds over one- and three-year periods.

While this may seem like average performance, lower deviation from the mean and less volatility than its index measured by standard deviation and beta, respectively, lend confidence. This fund is for less aggressive investors.

Portfolio Overview : The fund's portfolio has undergone a makeover as 22 stocks found their way in the February 2012 portfolio. The fund invests its assets in 40-45 stocks. The top 15 stocks accounted for 55 per cent of the assets in February.

The top three sectors — finance, consumer non-durables and pharma — cornered 25 per cent of the assets.

The portfolio turnover of the fund was 2.8 times, implying that it actively churned stocks.

In 2011, when banking stocks suffered on account of increasing cost of funds and higher NPAs, the fund took a timely call to reduce its exposure to the sector.

In contrast, the fund doubled its exposure to non-banking finance companies. This was its way of indirectly playing the consumer theme as it had reduced exposure to direct consumer plays.

The fund had conviction in auto and its ancillaries and some of the stocks in the portfolio also paid off well.

The fund is managed by Mr Kenneth Andrade.

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