Every second scheme outperforms CNX Midcap in 10-month period.
With mid-cap indices performing better than the Nifty and Sensex, mid-cap schemes of mutual funds have also picked up momentum and started outperforming the CNX Midcap index. The last 10 months have seen more than half of the mid-cap schemes outperforming the CNX Midcap index.
While the mid-cap index gave returns of 5.5 per cent last month, the average return posted by 40 mid-cap schemes stood higher at 5.82 per cent.
Twenty one of the 40 mid-cap schemes listed gave returns of more than the benchmark return of 5.5 per cent. The story is similar in the 3-month, 6-month and the 10-month periods. In the 3-month period, with the average return being 14.33 per cent, 26 funds outperformed the CNX Midcap index. In the six-month period when the average returns was 18.93 per cent, this number came down to 21.
Over the last one –year valuations of the mid-cap stocks have increased leading to an increase in the returns of these schemes, say fund managers.
"First of all, there has been a re-rating of mid-cap stocks in the market. During the economic downturn people, due to risk aversion, had avoided investing in mid-cap and small-cap companies because they were afraid that these companies would not survive. But on the contrary, these stocks have done very well. They have been trading at a discount of 35 per cent and recording growth," said Mr Gopal Agrawal, Deputy CIO and Head-Equity, Mirae Asset Global Investments.
Market valuations rise
The market valuations have been on the rise which has resulted in increasing large-cap stock prices. Analysts say that as the valuations get higher, the large-cap stocks start to lose their charm as they become too expensive. "Whenever markets attain a particular level, valuations of the large cap stocks increase. Right now, we are at a level where these stocks are not cheap anymore. So, the attention of the investors is on the midcap stocks. In fact, in the last two months, mid-cap indices have outperformed even the Sensex and the Nifty." said Mr. Kaushik Dani, Fund Manager - Equity, Peerless MF.
While mid cap funds may do well in a rising market, their returns across a complete market cycle have been sedate. Between 2007 and 2009 these funds had underperformed the index.
Out of the 40 midcap funds, on an average only about 12 schemes managed to do well against the Midcap index.
However, fund managers feel that in a stable economy mid-cap companies will continue to do well. "Investors need to have these stocks in their portfolio depending on their profile and their ability to take volatility. They should, at least, have 15 per cent of their portfolio invested in midcap stocks as these stocks will give higher growth." said Mr. Anoop Bhaskar, Head - Equity, UTI AMC.
Others, however, feel that the catching up of mid-cap stocks has already played out. "Going forward what will be important is individual stock selection. This will be the key for outperforming the index. Now that the bigger themes in the market have played out, investors will be looking at both the mid-cap and large-cap stocks. With valuations narrowing down, it isn't about large-cap or mid-cap stocks anymore," said Mr Mahesh Patil, Head, Equity - Domestic, Birla Sun Life.
"Our strategy was to take a call on conviction ideas. We reduced the total number of companies in the portfolio from 35-40 to around 25-30, but increased our asset allocation in these companies. Our focus was on sectors like banking and financial services, consumer goods, hospitality and even the aviation sector which was not doing well at that time." said Mr Sadanand Shetty, Vice-President and Senior Fund Manager – Equity for Taurus Mutual Fund.
"The long-term outlook remains positive. Good quality mid-cap stocks are available. India is a very large market, where most of the mid-cap and small-cap stocks are of superior quality. So, the interest of the investors should remain in this segment," said Mr Dani
Source: http://www.thehindubusinessline.com/2010/09/15/stories/2010091551851000.htm
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