Are mid-cap funds, such as Birla Midcap and Sundaram Select Midcap, an attractive investment option considering the recent rally in these stocks?
With the large-cap growth refusing to become a reality for quite some time now, it is no wonder that investors are drawn to mid-cap funds, Especially when some of them have yielded as much as 50 per cent this year. However, mid-cap stocks are generally more volatile and relatively less liquid than large cap stocks. This makes funds investing in mid-caps more volatile compared to their large cap peers.
During an economic recovery, smaller companies usually have a bigger bounce than larger ones, because they are working off a relatively smaller base. But this does not mean that every mid-cap stock will do well. Such companies also involve greater risks, such as limited product lines, a smaller market and lower financial or managerial resources.
Stock selection is thus critical to managing a mid-cap fund. Both Birla Midcap and Sundaram Select Midcap are new funds. They, therefore, do not have a performance history of even a year and their stock-picking abilities are untested.
Birla Midcap has defined mid-cap stocks as those with a market capitalisation between Rs 150 crore and Rs 1500 crore. The fund will strive to keep a minimum of 65 per cent of the portfolio invested in mid-cap stocks. The remaining amount can be invested in large-cap and small-cap companies. Sundaram Select Midcap on the other hand uses a relative rank classification.
According to Sundaram, mid-caps are those stocks, whose market capitalisation is higher than the smallest stock in the S&P CNX Nifty Junior and smaller than the smallest stock in the S&P CNX Nifty or the largest stock of the S&P CNX Nifty Junior, whichever is higher.
While mid-cap stocks have indeed rallied, it is difficult to make a call on their future direction. An economic recovery could brighten their chances further, but at the same time there has been much talk of resurgence in large caps.
In view of this, it is more important to take a decision on how comfortable one is with such companies and stocks. The increased volatility has also to be looked at while making a call on these funds. As mid-cap funds focus exclusively on a particular category of stocks, they should form a small part of the portfolio--say upto 25 per cent. Also in view of the very limited history of these funds, investors can also take a look at other mid-cap funds that have been around for longer.