Mid-Cap Funds: an opportunity to invest in uncertain market behaviour

Big investors like mutual funds and Foreign Institutional Investors are increasingly investing in mid caps nowadays because midcaps companies have the potential to become future heavy weights entities and the stocks of these companies are affordable to invest. Thus, investors in midcaps stand to benefit from their investment in this segment.

Midcap companies are in a stage of rapid growth and this high growth rate can give one excellent returns on investments. Such companies offer higher growth potential going forward and therefore an opportunity to benefit from higher than average valuations. Mid cap companies are looked upon as wealth creators and have the potential to join the league of large cap companies. Such companies are nimble, flexible and can adapt to the changes faster. One of the challenges that fund managers of mid cap funds face is to identifying such companies particularly in a situation when the price of large caps has increased substantially.

Infact as a testimony to the potential that midcap stocks holds, in the past three year, CNX mid-cap index has outperformed the benchmark equity index, Sensex.

Birla Sun Life Midcap Fund, considering its track record in delivering superior returns during market upswings and ability to reasonably contain downsides, has bettered benchmark CNX Midcap over one, three and five-year periods. Over a five-year period, it has delivered a compounded annual return of 29.5 per cent, placing it among the top few funds in the mid-cap category, as on 31st August 2009. During the same period CNX Midcap has delivered 22.5% return.

Birla Sun Life Midcap Fund is an open ended growth fund which focuses on investing in the Midcap segment of the market with a disciplined investment approach. The fund aims to maximize gains through investments in stocks with excellent growth potential. Diversification and superior risk control form an integral part of the fund management strategy to keep portfolio volatility at lower levels vis-à-vis the benchmark CNX Mid-cap Index.

The key portfolio strategy is summarized as follows:

• Focus on identifying scaleable businesses with objective of identifying tomorrow’s large-cap, stocks that can demonstrate strong growth over 3-5 years horizon
• Strong process driven investment philosophy matched with a disciplined risk management strategy.
• Sharp-eye on valuations.

Mr. Mahesh Patil, Co-head Equity, BSLAMC, said, “Birla Midcap has stuck to its mandate of investing in predominantly mid-cap stocks.  Out of a vast pool of mid-size companies, we select only those well-run, well-led ones that show all signs of becoming tomorrow’s leaders. For example, Bharti Airtel and Axis Bank were mid-size companies in 2002 and 2001, but today their stocks has appreciated by 47.65% and 64.96% respectively. The fund is suitable for aggressive investors who can choose the systematic investment route to ride out the market volatility”.

Over the 6 years since its inception, Birla Sun Life Midcap has already declared dividends 11 times. If investor had invested Rs 1 lakh in the scheme on its launch date, as on 31st August 2009, they would had have earned Rs. 2.57 lakh in tax free dividends alone and that’s in addition to the wealth creation.

Over the last few months, sectors that witnessed sharp rallies such as capital goods, banks, power and construction are back among the top few sectors held by the fund. Birla Sun Life Midcap Fund’s portfolio is well diversified across stocks as well as sectors and has consciously avoided concentration in select sectors. This may partly insulate the fund from any broader market correction.