MFs, FIIs target mid- and small-cap scrips

The benchmark stock index, Sensex, may be at a sniffing distance of the 14,000-point mark. But mutual funds and foreign institutional investors (FIIs) are now looking beyond the 30 Sensex stocks to buy into mid- and small-cap scrips.

They expect these index lightweights, which have not participated in the current rally in a major way, to deliver higher returns in the near future.

Analysts expect the mid- and small-cap stocks, where the valuations look attractive compared with those of the large caps, to fetch better returns once the Q3 and Q4 results are out.

These expectations have made them ideal investment candidates for mutual funds and FIIs.

Atlanta, Emco, IFCI, Hanung Toys, IL&FS Investmart, IDFC, S Kumars, Development Corporation Bank and Hindustan Motors are some of the counters where FIIs have been accumulating shares in the last few weeks. Some of the FIIs active in the counters include Merrill Lynch, HSBC, Goldman Sachs,

Ashburton Global Funds, UBS Securities and Morgan Stanley. "After the June meltdown, the top few stocks have been driving the markets to these heights. But, the mid and small caps have hardly touched their earlier peaks. Most of these stocks remain to be undervalued, which gives the investor a good reason to invest into as compared with index heavyweights," said Viral Trivedi, a research analyst with Padmakshi Financial Services.

Mutual Funds also see potential in mid caps. After DSP Merrill Lynch's Small and Mid Cap Fund collected nearly Rs 1,400 crore from the market, fund houses are coming out with schemes aimed at investing into mid- and small-cap stocks belonging to core sectors, such as infrastructure.

SBI's One India Fund, LIC's India Vision Fund, Lotus AMC's Mid Cap Fund and Reliance Mutual Fund's Long Term Equity Fund are some of the funds which have lined up their new fund offers.

"Technically, Sensex heavyweights like Reliance and Tata group companies have room for growth. But, fundamentally, it is difficult for large-cap stocks to cross a certain level, which some of the Sensex stocks have already reached. Mid-caps have not been able to do so, as they were not the flavour of the market. However, for mid-term investments, they have better chances of appreciation," Trivedi said.

Since June 12, Sensex has risen by a whopping 52 per cent to close on Wednesday at 13,616.73 points.

However, in comparison, the BSE Mid-Cap Index increased by 40 per cent to 5,227.85 points. BSE Small Cap Index gained by 42 per cent since June 13 to 6,635.01 points.

"The mid caps have seen a good second quarter and sectors like cement and banking continue to look as attractive investment opportunity. Infrastructure could prove to be the most interesting sector, as it is going to play a crucial role in the future growth plans of the country. If the economy has to grow at 8 per cent, then growth in infrastructure is a must, where most of the firms are of mid and small size. That could be the reason for the increase in FII participation in power and construction sectors," an analyst covering mid-caps with a top brokerage said.