Mid-cap stocks no more in favour

It was just a couple of months ago when mid caps stocks were a rage. Not wanting to miss the party, mutual fund investors made a scurry for mid cap funds. But as expected, the mid cap rally has fizzled out and large caps are back in the fray. Does that mean investors should exit mid cap equity funds and enter large cap funds now?

First lets understand why you invested in mid cap equity funds. If you invested because you are relatively young, have an appetite for risk and with a desire to diversify your mutual fund portfolio across large cap and mid cap funds, you had the right reasons for investing in mid cap equity funds.

Since equity funds need to be looked at with a minimum 3-yr investment horizon, the slack in mid cap stocks should not be a cause for concern. However, if you invested in mid cap funds because you had a 6-month investment horizon and saw no better opportunity to make quick money, then you may be a little concerned by the cooling off mid cap stocks are witnessing right now.

Mid cap funds: Losing steam?

Mid-cap funds	NAV (Rs)	1-Mth	6-Mth	1-Yr
HDFC CAPITAL BLD. G	32.45	9.01%	46.33%	46.90%
TATA EQUITY OPPORTUNITY A	25.87	8.56%	36.75%	29.47%
UTI THEMATIC MID CAP	11.83	7.92%	35.86%	-
SUNDARAM SELECT MIDCAP	32.98	7.91%	47.43%	37.24%
BIRLA MIDCAP G	28.97	7.60%	37.43%	34.53%

(Source: Credence Analytics. NAV data as on Dec. 9, 2004)

Its evident from the table above that mid caps funds haven't exactly been blown into oblivion over the last month. Its just that they aren't scorching the portfolios like they used to earlier. A 9.01 per cent appreciation over 1-mth by HDFC Capital Builder is by no means dismal. Likewise, other leading mid cap funds have posted a reasonable performance as well.

Large cap funds: Back in the reckoning

Large-cap funds	NAV (Rs)	1-MTH	6-MTH	1-YR
ALLIANCE EQUITY G	74.59	11.88%	42.16%	45.80%
BIRLA DIVIDEND YIELD G	27.54	11.58%	36.96%	38.06%
MAGNUM MULTIPLIER 93	19.77	10.73%	47.15%	36.09%
MAGNUM GLOBAL	14.62	10.62%	60.02%	70.54%
PRU ICICI DISCOVERY G	12.02	10.46%	-	-

(Source: Credence Analytics. NAV data as on Dec. 9, 2004)

The last few weeks clearly belonged to the large cap funds, the only exception being Magnum Global Fund (10.62 per cent), which invests predominantly in mid caps but still managed to retain its position despite the slowdown in the mid cap rally. Investors need to note that this does not necessarily indicate that we will see an extended rally in large caps now.

We would like to reiterate that its not a question of large cap funds or mid cap funds. From a diversification perspective it makes imminent sense to include both categories in your mutual fund portfolio, so that you have something working for you at various points in time.

More importantly, once you have identified the right funds -- both large cap and mid cap you need to sit on them patiently without getting unduly perturbed by the oscillations in large cap or small mid cap indices.

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