Small, mid-cap funds galore on better valuation

Attractive valuations of small- and mid-cap stocks compared with their large-cap counterparts have led fund houses to float a slew of schemes dedicated to these two segments.

The latest offer is from Principal Mutual Fund that launched its long-term equity scheme on Wednesday, aiming to raise Rs 400-500 crore.

"In a growing economy like India, mid-cap stocks are likely to fare much better than large-cap counterparts", said R Srinivasan, equity fund manager, Principal Mutual Fund.

Sundaram BNP Paribas Mutual Fund floated a small-cap scheme on January 10. Subscription to the five-year, close-ended plan closed Wednesday.

T P Raman, managing director, Sundaram BNP Paribas Mutual Fund, said, "These (small-, mid-cap companies) are usually new generation companies established by first generation entrepreneurs and have a lot of potential."

The fund house already has a mid-cap scheme in its product line.

Sundaram BNP Paribas Select Mid-cap Fund is a top performing scheme that has posted 52.23 per cent average return over a one-year period. In comparison, the diversified equity scheme category has given 31.98 per cent average return for the same period .

Recently, LIC MF India Vision Fund, which is betting on mid-cap stocks, raised Rs 242 crore.

Interestingly, all such schemes that were launched, or are in the pipeline, are close-ended in nature and have a fixed tenure of three or five years.

Funds prefer to float these schemes as close-ended because mid-, small-cap stocks are relatively illiquid compared with large-caps.

The close-ended nature of these schemes helps fund managers to take right bets and not worry about cash flows.

In close-ended schemes, fresh subscription is accepted only during the initial float.

Tridib Pathak, chief investment officer, Lotus India Mutual Fund, said, "Mid-cap investing should involve a lot of discipline. Being close-ended helps in liquidity management."

Lotus India Mutual Fund, the latest entrant in the domestic mutual fund industry, sought the Securities and Exchange Board of India's approval in November for its three-year, mid-cap equity fund.

R Rajagopal, equity head, DBS Chola Mutual Fund, said, "Such funds test the stock-picking ability of the fund manager. Growth rates of such stocks are higher, but you cannot expect to invest in every mid-cap stock and earn returns."

Rajagopal said such schemes, being close-ended in nature, helps the fund manager to take a long-term view. "Small companies have to be valued over 2-3 years," he added.

Other fund houses that are also likely to float similar schemes includes HDFC Mutual Fund, which filed papers with the Sebi this week for its five-year, mid-cap equity fund.

ING Vysya Mutual Fund has also sought the regulator's approval in December for such a scheme.