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While there are several equity funds from Franklin Templeton's stable with longer records, Flexi Cap's advantage is that it may start with a smaller corpus.

For mutual funds, the current craze seems to be market capitalisation-based funds. Two leading private sector fund houses, Franklin Templeton Mutual Fund and Kotak Mahindra Mutual Fund launched market-cap-based funds recently.

While Franklin Templeton has come out with a fund - Franklin India Flexi Cap Fund - that intends to capture investment opportunities across market-cap segments (large-caps, mid-caps and small-caps), Kotak Mutual is offering a mid-cap fund - Kotak Mid-Cap Fund.

Cholamandalam Mutual Fund, too, had launched a scheme called Multi-Cap Fund (in the second week of December 2004) which again is focused on the idea of allocation across market-caps.

There are already about six pure mid-cap funds, while several diversified funds have also reoriented their portfolios to benefit from the mid-cap rally last year. 
 

ISSUE SNAPSHOT
	Franklin India Flexi Cap Fund	Kotak Mid-Cap Fund
IPO	January 17-February 9, 2005	December 30, 2004-January 28, 2005
Type	Open-ended, equity	Open-ended, equity
Options	Growth and dividend	Growth and dividend
Initial offer price	Rs 10	Rs 10
Entry load	2.25 per cent for amounts up to Rs 5 crore, 0.50 per cent above Rs 5 crore	2.25 per cent, nil for purchase and switch-in from other schemes for more than Rs 2 crore
Exit load	Nil upto Rs 5 crore, 1 per cent above Rs 5 crore if redeemed within one year of allotment	Nil
Minimum application amount	Rs 5,000	Rs 5,000

Franklin India Flexi Cap Fund
This diversified equity fund will invest in companies through a bottom-up stock selection process, irrespective of their market capitalisation.

According to the fund, India is projected to become one of the largest economies in the world in the years to come.

"Given that good companies, whether big or small, are expected to benefit from the growth in the economy, Flexi Cap's strategy of investing in stocks across market capitalisations will help investors capture the growth potential of corporate India in a comprehensive manner," says Ravi Mehrotra, president, Franklin India.

The fund classifies large-cap companies as those with a market capitalisation of above Rs 1,500 crore, mid-caps as those with market caps between Rs 250 crore and Rs 1,500 crore and small-caps as those with a lower-than Rs 250 crore market cap.

Companies that fall within the same market capitalisation range often have similar performance characteristics.

For instance, mid- or small-cap stocks tend to be more nimble-footed and have the potential to deliver sharp growth. Large-cap stocks, on the other hand, tend to be less volatile in terms of size, market leadership, etc.

In terms of the risk-reward spectrum, Flexi Cap falls in the middle of the heap as far as Franklin's diversified funds are concerned.

The fund's current diversified equity portfolio includes schemes such as Franklin India Opportunities Fund, Franklin India Prima Fund, Franklin India Prima Plus, and Franklin India Bluechip Fund.

Bluechip Fund, which focuses on large-caps and Prima Fund, which mainly invests in mid- and small-cap stocks, have been in existence for over 10 years (launched on December 1, 1993) and have outperformed their benchmarks.

While Bluechip Fund has given a return of 27.90 per cent since inception compared to 6.5 per cent by the Sensex, Prima Fund has managed a return of 24.10 per cent compared to 7.10 per cent by S&P CNX 500 Index. For the past year, Prima Fund has given a return of 36.40 per cent, while Bluechip Fund has returned 24.60 per cent.

Flexi Cap plans to invest 10-100 per cent in large-caps, 0-70 per cent in mid-caps and 0-40 per cent in small-caps stocks with a 0-25 per cent allocation to debt securities and money market instruments.

The fund plans to look at liquidity as one of the key filters during the asset allocation process. Considering that both Bluechip Fund (Rs 1,961 crore) and Prima Fund (Rs 1,124 crore) already have large corpuses, the potential of big upsides in these schemes may be suspect.

Hence, the fund managers may have a better chance of producing big returns in Flexi Cap, which will have a smaller corpus to start with.

Even then success will depend on the fund manager's stock-picking ability in lower market-cap segments. Considering the record of Franklin Templeton, the scheme is worth a look.

Kotak Mid-Cap Fund
Kotak Mid-Cap is an open-ended equity growth scheme and will invest primarily in mid-cap stocks. According to the fund, mid-caps tend to generate higher growth than large-caps across global markets and India is no exception.

The reasoning appears sound when you consider the fact that the CNX Mid-Cap Index grew 44 per cent in 2004, outperforming the Sensex which grew only 13 per cent.

But investors should keep in mind the fact that in a bad market cycle, mid-caps tend to underperform large-caps. Thus while the rewards may be higher when the going is good, the risk is equally higher.

According to Rushabh Sheth, head of equity funds at Kotak Mutual, Kotak Mid-Cap is a product for those who invest in equities, considering the higher risk. "Investors should have an investment horizon of two-three years while investing in the product," he adds.

Kotak Mutual notes that apart from the high growth factor, there are other reasons for mid-caps to flourish in India. Many emerging sectors (textiles, food, retail, etc.) have no large-cap presence. So investing in mid-caps is the means to participate in the growth of these sectors.

According to Ajay Bagga, chief executive officer, Kotak Mutual, in India's transitioning economy, new business opportunities present themselves to be filled by emerging companies.

The fund managers note that despite the fact that several mid-cap stocks are trading close to their all-time high levels, the mid-cap story is a continuing one.

Kotak Mid-Cap plans to invest 65-95 per cent of its portfolio in mid-caps, 0-30 per cent in other equities and 5-35 per cent in debt instruments. Kotak MF classifies mid-caps as companies with a market capitalisation in the range of Rs 500-2,000 crore.

Kotak Mid-Cap will be another addition to Kotak MF's equity stable which includes funds like Kotak 30, Kotak Balance and Kotak Global. The performance of these funds has been good in the past with both Kotak 30 (29.01 per cent) and Kotak Balance (22.66 per cent) outperforming the benchmark Sensex (5.11 per cent) in terms of one-year returns.

The category average return for diversified equity funds for the period stands at 15.40 per cent. Both Kotak 30 and Kotak Balance have been consistent performers in the past too, with the funds recording three-year returns of 40.85 per cent and 29.15 per cent respectively.

Kotak Global, which was launched in 2004, has also been a consistent performer, recording a return of 44.74 per cent in the past six months.

While the premise of Kotak Mid-Cap is to generate good returns from the mid-cap segment, much will depend on the fund manager's ability to pick the right stocks in the segment which offer value and growth potential in the long-term.