Riding the mid-cap revival
They may have taken a beating when the stock markets were in a tumble late last year, but don’t write-off small- and mid-cap funds just yet. Sure, this class of investments does come with its extra bit of volatility, but that’s precisely why these funds do spectacularly well when the markets are rebounding, like now. In the last six months, the BSE mid- and small-cap indices increased a whopping 77 and 78 per cent, respectively.
THE MIDDLE PATH TO RETURNS | |||
|---|---|---|---|
Mid- and small-cap funds are pulling ahead of the large-cap funds. | |||
Fund | 3-month return | 6-month return | 1-year return |
| Principal Junior Cap | 47 | 98 | 14 |
| JM Basic | 43 | 89 | -32 |
| ICICI Prudential Discovery | 51 | 88 | 18 |
| Sundaram BNP Paribas Select Midcap | 49 | 86 | 7 |
| Tata Service Industries | 53 | 84 | 4 |
| Magnum Global | 44 | 83 | -7 |
| DBS Chola Midcap | 48 | 83 | 2 |
| Canara Robeco Emerging Equities | 41 | 80 | -7 |
| Birla Sun Life Midcap Plan A | 50 | 80 | 10 |
| Figures in % Ranking by six months’ returns | Source: Value Research | ||
By comparison, the Sensex lagged rising by just 56 per cent. The funds that invested in small- and mid-cap stocks were on a roll. These funds topped all other equity fund categories gaining 74 per cent, while diversified equity funds returned 58 per cent and balanced funds raked up just 38 per cent.
According to market experts, majority of the small- and mid-cap stocks were beaten down by as much as 80-90 per cent last year. Another major reason: their prices were hit so hard that the stocks were looking cheaper as compared to the larger companies. And typical of these stocks, they tend to rebound faster when markets bounce back. Consider the statistics: of the total 33 small-cap and mid-cap funds, 30 funds outperformed the Sensex in the last six months.
A FINE BALANCE | |
|---|---|
Pros | Cons |
| Mid-cap funds identify and invest in companies that are small but wellplaced on the growth curve. | These funds come with a higher risk as they tend to fall harder than larger companies in bad markets. |
| Smaller companies have the advantage of low base and usually tend to grow faster than large companies. | They have liquidity risks (fewer shares) thus making it difficult for fund managers to sell large blocks of shares. |
| Mid-caps outperform large caps and investing in them helps to diversify into high-growth areas. | Revenues and profits could be volatile due to competition, economic environment and limits on fund raising. |
So, what lies ahead? The economic environment looks better for the small companies than it was last year. The window of fund raising has opened up again, order flows are reviving, infrastructure is picking up and the worst seems over. Well-managed small companies can clock faster growth rates than larger companies.
Says Vivek Pandey, Fund Manager, SBI Magnum Midcap Fund: “The longerterm prospects still favour the smalland mid-cap funds as they have the potential to gain from the global economic recovery.” Given that the bear hammering was severe, many of these stocks are still cheaper compared to their large-cap counterparts. “There are still a lot of mid-cap stocks which are trading at discount, and with the liquidity situation easing up, there are chances that these stocks may go up,” adds Pandey.
Fund managers assure that investors can look at these funds as opportunities. The real challenge lies in picking up the right fund to make the best of the investing environment. If you can take the risks of a little volatility and illiquidity, these funds can still provide the kinds of returns that investors are looking for. On another note, see if the fund you choose fits your investment style. Says Apoorva Shah, Fund Manager, DSP BlackRock: “If yes, then over the next 3-5 year period, the volatility gets ironed out as they are expected to outperform the markets.”
