A route to mid-cap investing

Investors looking to gain from a potential rally in undervalued mid-cap stocks can take the mutual fund route to do so. Among options that carry relatively modest risks, DSP Midcap can be a suitable option for investors with limited risk appetites.

Across time-frames — one, three and five years — the fund has managed to outperform the Nifty 100 Midcap TRI, the scheme’s benchmark.

The extent of outperformance is 1.5-2 percentage points in the short and medium terms, while over a longer horizon of 5-10 years, DSP Midcap delivers 3-4 percentage points more than its benchmark. The scheme is generally in the top quartile in its category. A well-diversified portfolio with diffused stock holdings, prompt moves to increase cash and debt positions to reduce risks, and an ability to blend momentum and value picks well have helped the fund deliver above-average returns.

For investors of different hues — seasoned and recent — looking for suitable mid-cap avenues, DSP Midcap would be a solid option. The investment horizon, of course, should be 7-10 years.

The fund is especially suitable for SIP (systematic investment plan) investments, as it tends to ride out market volatility well. It can be a part of the core portfolio of investors.

Portfolio and strategy

DSP Midcap generally holds a portfolio of 50-65 stocks, with exposure to individual companies being less than 5 per cent almost always. This allocation makes for a diffused portfolio. The scheme also moves to cash and debt to the tune of 8-10 per cent of the portfolio during volatile markets. It also takes small exposures to large-cap stocks (10-15 per cent) at times. Thus, DSP Midcap is able to maintain a relatively modest risk portfolio, and ensures superior downside containment during corrections and reasonable upside participation when markets rally.

The scheme churns its top sectors periodically. Banks and finance companies used to figure prominently in the fund’s portfolio a couple of years ago. But DSP Midcap lightened up on NBFCs (non-banking finance companies) considerably as trouble brewed around the segment in light of the liquidity crisis since the middle of last year. It has held on only to high-quality mid-tier banks; RBL Bank and City Union Bank are a couple of examples. It has increased stakes in beaten-down sectors such as industrial products and pharma in the last one year.

DSP Midcap has focussed on stocks with considerable potential, but have witnessed corrections in these segments. Exide Industries, Supreme Industries, The Ramco Cements, Divis Laboratories and IPCA Laboratories are some of the fund’s prominent holdings. Thus, there is a perfect blend of momentum and value picks that can play out well over the long term. DSP Midcap is a suitable option for saving towards long-term goals.