Increasingly, mid cap funds have turned out to be a popular avenue for investors. The sharp growth clocked by mid cap stocks/funds has no doubt played its role in endearing them to investors. However, since mid cap funds as an equity fund category, does not have enough funds with established track records (over 3-5 years), selecting the right mid cap fund can be quite a task. The Personalfn Research Team presents two mid cap funds that aggressive investors should consider investing in.
Mid cap funds are mandated to invest predominantly in the stocks/shares of mid cap companies. Such companies are usually under-researched, thereby providing an investment opportunity that is yet to be recognised by the market. Well-managed mid cap companies offer higher growth potential and can clock above-average returns over longer time frames (3-5 years).
On the flipside, investment in mid cap companies tend to be riskier. Being under-researched there may not be critical information for an accurate evaluation of its prospects; in effect the fund manager could make a wrong investment call impacting the fund's fortunes adversely. Also, the possibility of mid cap stocks remaining illiquid for some time also exists.
Franklin India Prima and Sundaram Select Midcap are two mid cap funds that we like; risk-taking investors should consider investing in them. Two factors that lead us to choose these funds over others include a) established track record b) process-driven investment approach.
Track record
In the mid cap equity fund segment, track record which is important anyways, assumes even more significance. This is because mid caps are inherently risky and if you have decided to go with a particular mid cap fund, it better have a well-established track record over 3-5 years of selecting well-managed mid caps that have created wealth for their investors. Both Franklin India Prima and Sundaram Select Midcap have track records of at least 5 years (the latter will complete 5 years later in this month).
Process-driven investment approach
In the process-driven investment approach, the fund house is not held hostage by a star fund manager/Chief Investment Officer who calls the shots. In other words the processes/investment ideas belong to the star fund manager, when he leaves the processes/ideas go with him. This hurts both the fund house and investors, the latter in particular are left worrying whether the fund can do without him.
At Personalfn, our preference is for process-driven fund houses that have well-established processes. The fund manager/CIO plays an important role to the extent allowed to him by the investment processes. Both mid cap funds we like fall into this category; they are guided by well-defined processes which leaves no scope for star fund managers although in K. N. Sivasubramanian (Franklin Templeton Mutual Fund) and N. Prasad (Sundaram BNP Paribas Mutual Fund) you have 2 very competent fund managers.
Fund comparison
| Midcap Funds | NAV (Rs) |
Top 10 Stocks (%) |
1-Yr (%) |
3-Yr (%) |
5-Yr (%) |
Since Incep. (%) |
Std. Dev. (%) |
Sharpe Ratio (%) |
| Sundaram BNP Paribas Select Midcap | 98.19 | 20.60 | 37.0 | 66.2 | - | 59.5 | 6.20 | 0.51 |
| Franklin India Prima Fund | 225.06 | 48.84 | 45.1 | 48.4 | 50.5 | 25.8 | 6.85 | 0.30 |
| CNX Midcap | 54.7 | 45.1 | 39.9 |
Sundaram Select Midcap Fund
Sundaram BNP Paribas Select Midcap Fund launched in July 2002, maintains a well-diversified portfolio by investing in a larger number of mid cap stocks (compared to peers). Given the inherent risk in mid caps, this can help in reducing the overall risk of the portfolio through diversification.
Cash is king
Another highlight of the fund is that it holds cash for strategic purpose. Put simply, this means that if the fund is not comfortable with stock market levels, it resorts to increasing cash allocation until such a time when the stock market scenario changes to its liking. This move has helped the fund and its investors considerably, a case in point is the market crash in May 2006 when the fund's 35 per cent cash allocation saved the day for investors.
NAV returns
Over 3-Yr, the fund's NAV (net asset value) has appreciated by an impressive 66.2 per cent CAGR (compounded average growth return). The fund is on the verge of completing 5-Yr in the industry; hence, its since inception return (59.5 per cent CAGR) is representative of how the fund has performed over this time frame.
Volatility
SBNPM's track record in countering volatility (Standard Deviation 6.20 per cent) is relatively impressive. This implies that SBNPM's high growth performance has come at lower volatility, which is something of a rarity in the mid cap equity fund segment in particular. On the same lines, SBNPM clocks the most impressive performance on the risk-adjusted return parameter (Sharpe Ratio 0.51 per cent). This implies that the SBNPM has more to show for in terms of a return per unit of risk taken.
Diversification
The fund pursues a very well diversified investment strategy. In the mid cap funds segment, investors are unlikely to find a more diversified fund in terms of stocks. It is clear that within a high risk area like mid caps, the fund's idea of de-risking the portfolio involves populating the portfolio with a larger number of mid cap stocks. As on May 31, 2007, the fund had 114 companies in its portfolio, although an unusually high number, a usual feature in the fund's portfolio. The top 10 stocks in the fund's portfolio accounted for 20.6 per cent of net assets. At Personalfn, we believe that a diversified equity fund should hold no more than 40 per cent of its assets in the top 10 holdings.
Franklin India Prima fund
Franklin India Prima Fund launched in December 1993 has been in existence for well over a decade. The fund has an impressive track record across time frames and market phases; this is evident in its net asset value appreciation. The fund has clocked a growth of 48.4 per cent CAGR and 50.5 per cent CAGR over the 3-Yr and 5-Yr periods respectively. While there have been some concerns in the recent past about FIPF's performance and investment calls, in our view given the wealth of experience of the fund management team, this is more of a short-term blip.
Diversification
FIPF is mandated to invest primarily in stocks of the mid and small sized companies. For some time now its portfolio has a little more than the 40 per cent net assets (in its top 10 stocks) that we like to see in a diversified equity fund. The portfolio displays a fair degree of consistency in terms of stock picks.
Volatility
With a Standard Deviation of 6.85 per cent, FIPF performs well on the volatility control front. This means that the fund has succeeded in delivering on the returns parameter at lower levels of risk. On Sharpe Ratio (0.30%), FIPF's performance isn't as robust.
We also did a small analysis to determine how much Rs 100 invested around 5 years ago (given that SBNPM was launched on July 30, 2002) in SBNPM, FIPF and the CNX Midcap has grown over the years. The results are there for all to see. Rs 100 invested 5 years ago in the CNX Midcap would have appreciated to Rs 610.0. On the other hand, the same amount invested in SBNPM and FIPF would have grown to Rs 992.0 and Rs 849.0 respectively.
As our research underscores, both SBNPM and FIPF offer an attractive investment proposition to risk-taking investors. To that end, they should consider investing in either or both the funds in line with their investment objectives.
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