The middle path to mid-cap exposure
If you are looking for mid-cap exposure but with limited volatility, you can consider phased investments in units of HDFC Mid-Cap Opportunities. With a return of 14 per cent compounded annually in the last three years, the fund is neck-to-neck with established peers such as IDFC Premier Equity.
This return is also superior to the 3.6 per cent annual return managed by its benchmark CNX Midcap. The fund completed five years in mid-2012 and has now seen a full market cycle. Its ability to contain downside and provide superior risk-adjusted returns makes it a good candidate for investors who are not too adventurous.
HDFC Mid-Cap Opportunities can be labeled as a less risky fund among the universe of mid cap schemes. This is because its exposure to small or micro-cap stocks is not as high as certain other peers such as SBI Magnum Emerging Businesses or DSP BR Small and Mid Cap.
That said, the fund still remains riskier than regular diversified equity schemes and will fit only a long-term wealth building portfolio. You can consider the SIP option spread over not less than three years. Avoid stopping SIPs in a down market. That is the time you can average your cost. Review your SIPs only when the fund under performs peers for a period of six months to a year.
HDFC Mid-Cap Opportunities beat its benchmark CNX Midcap 82 per cent of the times, on a one-year rolling return basis in the last five years. That is an above-average performance, considering this midcap index is a tough benchmark to beat. Its five-year annual returns at 7.5 per cent, may seem lack luster, thanks to the market peak five years ago, but its SIP returns gives the true picture.
At 20 per cent annually (IRR), the fund’s SIP returns over the last five years is about the same as IDFC Premier Equity and is marginally higher than others such as DSP BR Small and Midcap and Religare Midcap. But it is worth noting that the HDFC MI-Cap Opportunities’ SIP return is lower than the 27 per cent managed by SBI Magnum Emerging Businesses over this period.
This is because the later is more volatile, thus providing scope for higher averaging. It is also more aggressively managed. Seen from a risk adjusted basis over this period (measured by sharpe ratio), HDFC Mid-Cap Opportunities scores over Magnum Emerging Businesses.
HDFC Mid-Cap Opportunities was a close-end fund until mid 2010. Therefore, it was easier for the fund to combat the market meltdown in 2008 and bounce back in 2009 as it comfortably stayed almost fully invested in equities. But even after it became open-ended, the fund continued to stay over 90-percent invested in equities, irrespective of market volatility. This feature is true of most other funds from the HDFC stable.
In 2011 for instance, when funds such as IDFC Premier Equity went as low as 75 per cent in equities, HDFC Mid-Cap continued to hold 92-95 per cent in this segment. This is also one strategy that we prefer in the fund compared with IDFC Premier Equity. We have taken the later for most comparison purposes because IDFC Premier Equity too, does not heavily invest in very small companies. But then given its growing asset size, IDFC Premier has higher exposure to larger companies compared with HDFC Mid-Cap Opportunities.
Hence, while the former may be better suited for those with little risk appetite, HDFC Mid-Cap still dons a better mid-cap profile. HDFC Mid-Cap Opportunities currently sports an interesting portfolio with high exposure to banks, pharma and interestingly, industrial products.
At this point, we like the exposure that this fund has than the sectors such as FMCG and services that IDFC Premier Equity holds. Carborundum Universal, Allahabad Bank and Sundaram Fastners appear to be some of its value picks. Stocks such as Supreme Industries, Solar Industries and Shanthi Gears rewarded well. The fund is managed by Chirag Setalvad since inception.