<div><em>Choosing the right mid-cap mutual fund for one’s portfolio may not be as easy as placing your bet on a large-cap fund. Here are some pointers, says <strong>Sunil Dhawan</strong></em></div><div> </div><div>When the markets are lying low and not going anywhere in a hurry, it’s largely because of the large cap stocks. The interest being shown by foreign as well as Indian institutions may be absent thus keeping markets flat. Data as per studies in the past have shown that nearly 50 percent of foreign money is in nearly 30 stocks, all in the flagship index. </div><div> </div><div>Markets love triggers and it is what is lacking. The wait for Bihar results could be a factor but then the corporate earnings have also remained lackluster especially in relation to sales revenue rather than profits. In these times, the focus somehow shifts to mid and small cap stocks and mid and small cap mutual funds. Typically, MF schemes that invest in shares of companies with a market capitalization of Rs 1,000 - Rs. 5,000 crore are called mid-cap funds. Small-cap funds target companies with a market cap of less than Rs.1,000 crore. </div><div> </div><div>Performance of such funds starts getting focus, with returns over 6 months to 3-5 years being showcased against other equity funds or the benchmark indices. When large caps don’t move, it’s the mid-cap sector that start generating interest and returns too. Nothing wrong, except as an investor, one needs to understand the role of such funds in one’s portfolio before laying hands on them. Also important is to understand how they react when markets go up and when markets fall. The risk attached to such funds may or may not suit our risk profile.<br><br><img alt="" src="http://bw-image.s3.amazonaws.com/MidCAP-Table-Lrg.jpg" style="width: 650px; height: 551px; margin: 1px;"></div><div> </div><div><strong>Here are few things to take note of while investing in mid-cap MFs:</strong></div><div> </div><div>•<span class="Apple-tab-span" style="white-space:pre"> </span>As per industry experts, when markets move up, it’s the large-cap sector that is first off the blocks. This could be attributed to larger liquidity in large size stocks and hence more institutional interest in them. Sound mid-size companies and the funds that have invested in them may still see positive response. </div><div> </div><div>•<span class="Apple-tab-span" style="white-space:pre"> </span>Such companies are in the growth stage and hence potential may look huge. Growth at what cost and how much of leverage need a look. Most such firms are also under researched as they fall outside the radar of big analytical firms.</div><div> </div><div>•<span class="Apple-tab-span" style="white-space:pre"> </span>Read the portfolio of few such funds carefully. Unlike the large cap funds, stocks and sectors of mid-cap funds needs a second look and careful evaluation.</div><div> </div><div>•<span class="Apple-tab-span" style="white-space:pre"> </span>See if the investment style is value driven or growth driven or a blend of both. Check exposure to top 10 or top 5 stocks. Most such mid-cap funds could be investing in large cap too. See how much is the exposure as a high exposure will defeat the purpose. The price/earnings of the top 3-5 holdings may also be looked at. These things will help you take a more informed decision and diversify your portfolio better.</div><div> </div><div>•<span class="Apple-tab-span" style="white-space:pre"> </span>Ratings can be a good starting point as they take into account risk-adjusted returns rather than absolute returns over a fixed period. The risk that a fund takes to generate returns is an important parameter.</div><div> </div><div>•<span class="Apple-tab-span" style="white-space:pre"> </span>The potential is high in them as small and mid-size companies could have the potential to maneuver faster in the increasingly changing business environment when compared to larger firms. The risk too is high as the probability for a mid-cap to convert into a large cap may not be high. </div><div> </div><div>•<span class="Apple-tab-span" style="white-space:pre"> </span>Your exposure to such funds should be limited. Not more than 20 percent into small and mid-cap funds could be ideal. The idea is to add them to portfolio to boost overall returns.</div><div> </div><div>•<span class="Apple-tab-span" style="white-space:pre"> </span>Link investments in such funds only for long term goals. As these funds are highly volatile, they need longer term to deliver. Most of such funds would generate returns over 3-5 years period. </div><div> </div>
