Midcap Funds Archives

NFO review: HSBC Mid Cap Fund opens for subscription

HSBC Asset Management (India) Private Limited has announced the launch of HSBC Mid Cap Fund, an open-ended equity scheme predominantly investing in mid-cap stocks. The NFO period is from September 6 to 20, 2021 and in this time investors can get per unit at Rs 10. After the NFO period, the midcap fund will be available for ongoing subscription at prevalent NAV. Read on to know more.

Fund objective

HSBC Mid Cap Fund aims to seek long-term capital growth from an actively managed portfolio of equity and equity-related securities of predominantly mid-cap companies. HSBC Mid Cap Fund will follow Nifty Mid Cap 150 Index TRI Benchmark and will be managed by Ankur Arora, SVP and Fund Manager, HSBC AMC.

Key features

The important features of HSBC Mid Cap Fund include

* Exploring opportunities in the expansionary theme that support Mid and Small cap companies to generate alpha

* Investing in innovative and new-age companies with disruptive product and service ideas to grow faster

* Investing minimum 65% of AUM in mid-cap stocks

Following the â€˜4Qâ€™ investment approach while identifying investment opportunities, HSBC Mid Cap Fund will focus on

o Quality of Business: Scalability of business, Competitive Advantage, Market Share, Longevity, Pricing power, Brand strength

o Quality of Management: Track record, Corporate governance, Promoter background, Capital allocation

o Quality of Earnings: Consistency in earnings, Capital intensity, Cash flows

o Quantum of Earning: Strong growth in earnings

Fund-house speak

Commenting on the launch of the fund, Ravi Menon, CEO, HSBC AMC said, â€œWe do believe that midcaps offer a more diversified universe for investment and with the current emerging themes it also offers quality investment opportunities. With a quality portfolio, we are confident that HSBC Mid-Cap Fund will be a healthy addition to the customerâ€™s portfolio for long term compounding.â€

Talking about the fundâ€™s investment strategy Ankur Arora, Senior Vice President & Fund Manager, HSBC AMC said, â€œHSBC Mid Cap Fund aims to build a concentrated portfolio through the bottom-up implementation of stock ideas and top-down approach for prudent risk control. The fund will explore opportunities in the innovative disruptive theme and is expected to benefit from the construction of a fresh portfolio which is at the beginning of the expansion cycle.â€

Midcap fund category scan

There are 27 midcap equity funds in the MF industry. Midcaps funds in total have Rs 1.42 lakh crore assets under management. This is a popular fund segment in the market.

The most popular midcap funds are HDFC Mid-Cap Opportunities, Kotak Emerging Equity, Axis Midcap, DSP Midcap, Nippon India Growth, Franklin Prima, L&T Midcap, Sundaram Midcap, UTI Midcap and SBI Magnum Midcap. These are all actively managed funds.

There are a few passively managed funds as well in this space such as ABSL Nifty Midcap 150 Index Fund, Nippon India Nifty Midcap 150 Index Fund, ICICI Pru Midcap 150 ETF, Motilal Oswal Nifty Midcap 150, Nippon India ETF Nifty Midcap 150 and Motilal Oswal Midcap 100 ETF. These options have lower expense ratios (15 bps to 100 bps).

In the the past 1 year period (trailing basis), midcap funds on an average have gained 66%. In the 3 year period, the midcap fund category has clocked 17.2 per cent CAGR while in the 5 year period they have given 15.44 per cent CAGR.

In terms of rolling return basis, midcap funds as a category over 3 year period have generated 8.1 per cent returns and over 5 year period have reported 15.2 per cent returns.

Why midcap

Midcap funds present an opportunity to invest in a portfolio of predominantly mid-sized companies with faster growth potential. This provides diversification to an investorâ€™s overall equity mutual fund portfolio.

As per mandate, midcap funds invest predominantly in mid-cap stocks (65-100%), and the balance in small-cap stocks, large-cap stocks, and debt instruments (0-35%).

Do note that the volatility of a portfolio dominated by mid-cap stocks will be higher than largecap stocks.
Note: You can invest in NFOs on Wealthzi.com.

Should you allocate more money to small and mid-cap funds?

If you look at 2018 and 2019, mid cap and small cap mutual funds had severely underperformed large caps. The main reason behind this was the crisis after crisis in the financial markets starting with the IL&FS problems, the Goods and Services Tax (GST) rollout by the government and then came the pandemic related economic mess up. Slower economic growth meant slower business for mid and small cap companies when compared to the large cap ones. So, these businesses become more volatile, their balance sheet gets affected and the company cash flows are impacted. This means that the earnings growth of mid and small cap companies will be lower and hence the valuation and stock prices will fall.

This underperformance of the mid and small cap stocks segment is almost cyclical. If you look at 2013- 2017, since the end of 2013 till 2017, mid and small cap stocks did not see any major corrections and were richly valued. Since January 2018 till the end of the lockdown in 2020, mid cap and small cap indices had seen a sharp pull back while the broader markets have underperformed. During that time, more than 85% of the top 1000 stocks in the market had fallen by more than 50% while more than 500 stocks had corrected by 60%. The downturn during these 2 years has been one of the longest and deepest falls, especially for small cap stocks.

Getting back on track

However, things started changing in July-August once the economic activity started resuming in the country. Midcaps and especially small cap stocks have done much better than the large cap ones. So, one can clearly see that the mid/small cap space is bouncing back.

This is obviously a plus for mid and small cap mutual funds. One-year returns of mid cap and small cap funds were in double-digit negatives at the start of 2020. Now the one-year category average is much more than 10% for mid cap mutual funds while small cap mutual funds have provided returns of over 13% in the past year. In the last three months, the small cap mutual fund category has given an absolute return of over 17% and the mid cap category has provided 10%. So, these segments now provide a good investment opportunity for those who have a higher risk appetite and are looking to make more returns from mutual funds in the long term.

So, what’s happening with large caps?

The large cap funds segment is not seeing much action. The one-year category return for large cap funds is just about 1.9% while the three-year return in this category is only 5%. So, the present deviation between performance of large, mid and small cap funds is at historical highs. The valuations of mid and small cap stocks when compared to the Nifty is now close to the lows that were seen in 2014. Such deviations in returns don’t last for too long, especially once the mid and small cap stocks have started to outperform large caps. Mutual fund analysis believe that this trend might continue over the next 18-24 months.

What are the market indices signaling?

The BSE Midcap index after reaching a high in January 2018 is down by 2.4% in the last 3 years while the BSE Smallcap Index is down by 3.9%. At the same time, the BSE 100 Index has increased by around 4.25%. However, when you look at the one-year return, things are different. While the BSE 100 has provided 1.3% in the past year, the BSE Midcap index is up by 4% while the BSE Smallcap Index has gone higher by more than 14%. This shows a trend reversal in the mid and small cap stock segments.

So, fund managers believe that this might be the right time for investors to build their mid and small cap portfolio. However, it is best not to go overboard with these segments as the risks are much higher. Investors should stick to their desired asset allocation strategy and consider their risk-taking capacity before investing in mid and small cap funds. You need to stick to them for the long term if you want good returns. Don’t know which are the right mid and small cap mutual funds for you? Get help from wealthzi.com.

How to invest in mutual funds for financial goals

You might have heard financial experts tell you that you can invest in mutual funds for goals such as your retirement or your kid’s education. This is because over long periods, equities have the potential to outperform every other asset class. However, you can use mutual funds for short term goals like saving up for your dream vacation or that SUV you always wanted to buy. Here’s how to invest.

The basics

While drawing up a mutual fund portfolio, keep these basic rules in mind: know the broad categories of schemes in the market, their purpose and how they work. For instance, knowing the difference between income funds and gilt funds—where they invest, their portfolio and what kind of returns they are likely to generate- will help you choose the right fund.

Ensure that the mutual fund you choose matches your risk profile and investment objective. Let’s say you know that you need to invest in equity mutual funds for your retirement. However, you have a low risk appetite. In that case, you will be better off investing in index funds rather than actively managed mutual funds. So, respect your risk-taking capacity. Do not go overboard on equities if you are not comfortable taking on the risk.

Earmark funds for each of the goals. Let’s say you are investing in ELSS mutual funds for your kid’s education that is 15 years away. ELSS funds have a lock-in period of 3 years. Once the lock-in is done, ensure you reinvest the money in another investment. Linking your investments to your goals will help ensure that you don’t use the money for other purposes before you achieve the goal.

As you move closer to your goals, start moving your money from equity mutual funds to debt oriented mutual funds. Say your kid is in class 10 and will go for engineering course after he completes schooling. Since you have only two years in hand, you should choose debt-oriented funds such as bond or short-term funds that will be available at any time. You also preserve your capital gains from equities if you move to debt mutual funds.

The ideal way to build an adequate corpus for your goals is to go step by step. Earlier you start, the better money you will be saving. Of course, you also need to stop along the way occasionally to make sure things are happening as planned. The closer you get to your destination, the more careful you need to be.

Choosing the fund

Have a mix of large- medium- and small-cap equity schemes if you are investing for long term goals. If you will need the funds in about 8-9 years from now, opt for mid and small cap funds. However, if the goal is five years away, you may want to stick to large-cap funds as they invest in well-established, top-rung companies and are, therefore, less volatile. They give reasonable gains when equity markets rise and are also comparatively less volatile when equity markets fall.

High risk funds like thematic funds can be considered to get the kicker in returns only if you have a higher risk profile. The idea is to take the equity advantage and yet control the risks you take. Choose well-performing equity schemes with established track record.

If you are investing for the short term which is more than one year, choose from a range of income funds, credit risk, dynamic bond funds, duration funds and bond funds. If you can take higher risks, you can invest in thematic debt funds such as Sundaram Banking & PSU Debt Fund. If you need to invest for less than a year, you could invest in liquid funds and short-term debt funds.

Diversification across funds

Diversify across and within mutual funds. Don’t diversify for the sake of diversification or over-diversify within asset classes. You can invest in up to three schemes in a category at most. Remember, one of the reasons you have opted for mutual funds is because you do not want to spend a lot of time on your investments. But you might spend more time on your mutual funds if you scatter your money across too many schemes. The rule holds true whether you are investing in the equity or the debt market. If you invest in too many schemes with the same or similar style, you could end up investing in same stocks through multiple funds. Even though there is no fixed number as to how much one should hold in one’s portfolio, it can be at the most 7-10 schemes. This makes it easy to manage your portfolio.

Portfolio review

If you think that your job is done once you have put your money in mutual funds, think again. Your portfolio may contain star performers, but just a couple of oversights could affect their performance. So, track your scheme’s Net Asset Value (NAV) on a monthly/quarterly basis. Look for changes in the scheme’s portfolio. Compare the scheme’s performance with that of the benchmark, or similar schemes of other mutual funds. Ensure that the fund is adhering to the fund objectives stated in the offer document. Read all those various periodic statements such as newsletters, and half-yearly and annual reports. Make sure you track your fund at least every 18-24 months.

Choosing the right mutual funds for each of your goals will help you achieve them without hassles and in right time.

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