Funds gung-ho on mid-cap theme

Investors are looking for new investment ideas at a time when equity markets are near their all-time high levels and most of the blue chips are priced higher in absolute value terms. In this scenario, the mid-cap theme has proved beneficial for the domestic mutual fund industry.

Mid-caps were among the best performers in the equity diversified category, which has resulted in a spate of new launches in this segment as more funds rushed to cash in the opportunity, fund managers said.

Mid-cap funds have beaten their diversified counterparts by a big margin over the last three months, analysts said. In the three-month period ended May 26, the average absolute return posted by mid-cap funds was 7.26 per cent compared with 4.29 per cent by diversified equity funds, they added.

This trend can be buttressed by the fact that the benchmark NSE CNX Midcap 200 index posted an absolute return of 92.04 per cent in the last one year compared with 38.72 per cent return by the BSE Sensex and 37.62 per cent by the NSE Nifty. Besides, an analysis of the top 10 holdings of leading diversified equity funds reveal a predominance of mid-cap stocks, analysts said.

Do all mid-cap funds provide a ticket to investing glory? According to Ved Prakash Chaturvedi, managing director at Tata Mutual Fund, which recently launched the Tata Mid Cap Fund, "a rigorous analysis of the entire spectrum of mid-cap stocks would show that all those which would perform in a rising market would not necessarily be fundamentally strong. The trick lies in being able to zero in on the correct long-term bets based on sound risk management and proven stock picking skills."

But doesn't the same apply for diversified funds as well? In the words of a senior fund analyst, "Mid-cap is only a stage in the life of a company or a stock. It is not the result of a business model or a management decision to maintain it at that level. So the underlying principles of running a mid-cap fund are very similar to those of a diversified equity fund."

Like in any developing economy, the Indian mid-cap stocks were undervalued for a long time and the recent rally has only served to narrow down the gap. In the next phase, while the market selectively rewards individual stocks on the basis its growth prospect, the journey may become risky.

That is why investors are being urged to allocate only a certain portion of their investment to mid-cap funds which can be kept invested for a longer term of three years and more.

There are some other concerns also. Analysts said that as these funds grow bigger in size - as more and more investors join in - their exposure to companies in the mid-cap segment are also bound to get bigger. This means that when things go wrong and considering lesser liquidity in the mid-cap stocks, these funds may face a liquidity crunch.

Also, considering the current uncertainty in the markets with index returns going down, there are doubts about the logic of investing in the mid-cap segment, specially if things go wrong.