Funds bet on small, mid-caps

Attractive valuation of small-cap and mid-cap stocks, compared with their large-cap counterparts, has led the domestic fund industry to float a slew of schemes to invest in such stocks.

In the growing domestic economy, small- and mid-cap shares are expected to give 20-25 per cent annual returns, fund managers said. In order to capitalise on the prospects of this segment, a few more fund houses have planned similar offerings.

In May, Birla Sun Life Mutual Fund and DSP Merrill Lynch Mutual Fund offered schemes that bet on the potential of small- and mid-cap shares.

Birla Sun Life Long Term Advantage Fund - Series 1, a three-year equity scheme that would invest at least 65% of its corpus in such stocks, raised nearly Rs 4 billion during the new fund offer period, April 9-May 18.

A. Balasubramanian, chief investment officer, Birla Mutual Fund, said, "Small-cap shares are available at cheap valuations in terms of their growth prospects. So, that's the reason why everybody is floating such schemes."

DSP Merrill Lynch Mutual Fund also raised Rs 3.2 billion in 3-year Micro Cap Fund.

The fund house expects DSP Merrill Lynch Micro Cap Fund, which invests in small-cap shares, to give 20-25 per cent annual returns, according to Soumendra Nath Lahiri, senior vice-president and co-head of equity investments.

DSP Merrill Micro Cap Fund will seek to invest at least 65 per cent of its corpus in stocks of companies having a market capitalisation below or equal to Rs 15 billion.

According to Lahiri, the micro-cap fund's portfolio will comprise 40-45 stocks, with individual weightage in the range of 2.0-4.5 per cent.

Jayesh Shroff, fund manager, SBI Mutual Fund, said, "Last one year, large-caps have performed. This has created a valuation gap between large-, small- and mid-cap shares. The valuation gap has expanded and so funds want to utilise that opportunity."

Recently, HDFC Mutual Fund garnered nearly Rs 1200 crore from over 200,000 applications in HDFC Mid-cap Opportunities Fund that closed for subscription on June 8.

On returns, Shroff said, "Amidst rising Indian economy, small- and mid-cap shares have to perform. They should give 5 per cent more returns than the large-cap index, say 20-35 per cent."

On Tuesday, multi-manager funds specialist Optimix sought the Securities and Exchange Board of India's permission for small- and mid-cap funds.

Others like DBS Chola Mutual Fund have planned a 18-month small- and mid-cap scheme, while Benchmark Mutual Fund has filed papers for a mid-cap exchange traded fund.