Mid-cap funds find favour in volatility

Equity fund investors have found a gainful option in mid-cap funds "" and with good reason. For, mid-cap shares have been witnessing a revival after the general elections-related turmoil in equities.

The benchmark CNX Midcap-200 index has returned close to 10 per cent in the last three months compared with the 1.06 per cent posted by the Nifty and 0.64 per cent by the Sensex in the same period.

This has prompted some fund houses to come out with schemes focussed on the mid-cap shares.

Cholamandalam has already launched its mid-cap fund, while Prudential ICICI and Kotak Mutual are expected to launch their versions soon.

Even Tata Mutual Fund has repositioned its once close-ended Tata Ind Navratna post maturity into Tata Growth Fund, which is predominantly focused on the mid-cap segment.

Mid-cap shares form the bulk of stocks that are listed in the exchanges on Wednesday, to the extent that the benchmark index CNX Midcap 200 represents about 68 per cent of total market capitalisation and 72 per cent of the total traded value of stocks listed on the NSE.

Typically, stocks that have market capitalisations between Rs 75 crore and Rs 750 crore are termed mid-cap stocks, according to the definition of CNX Midcap 200.

Industry analysts said that there are valuation gaps between mid-caps and large-caps and these present the skilled fund managers opportunities for value creation.

It has been seen that in the first phase of a bull run, the large-caps, particularly the index stocks lead the rally. When the valuation differential between the large-caps and the mid-caps becomes high, the second phase of the rally starts.

It is then that the mid-caps start participating in the bull run.

Mid-cap funds were the biggest gainers in the last year's rally. Among the top three gainers of 2003, two were mid-cap funds - Franklin India Prima and Sundaram Select Midcap.

Even in the first five volatile months of 2004, the S&P CNX Mid-cap 200 Index has fallen 16.48 per cent, which is 2 per cent less than the fall of Sensex.

But as an investment advisor points out, fund houses should not over-hype the product as they have done in the recent past with the monthly income plans (MIPs).

On the contrary, they should be clear in communicating the following aspects to any prospective investor in a mid-cap fund.

He needs to have an appetite for higher risks that accompany investment in mid-caps, should be patient enough to wait and see the investment grow over a long term and finally possess a desire to diversify his equity portfolio over a medium to long term.