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Small bets, big profits

Small- and mid-cap funds have been outperformers in the past one year, but this should not make them the mainstay of your fund portfolio.

twitter-logo Tanvi Varma        Print Edition: Nov 28, 2010

You did not need the Midas touch. All you required were some mid- and smallcap stocks to make your portfolio shine. All 10 top performing equity diversified funds in the past one year have mid- and small-cap stocks packed like sardines in their portfolios.

At the top is the DSPBR Small- and Mid-cap Fund (see The Chosen Ones), which has 58 per cent of its corpus invested in mid-caps and 37 per cent in small-caps. Stocks such as Bayer CropScience and E.I.D. Parry in its portfolio have risen by around 150 per cent since the January 2008 peak.

The mid- and small-cap funds are also known as emerging opportunities or emerging businesses funds. They typically invest in small companies that have the potential to turn into large-cap companies.

 A mixed blessing
  • Mid-caps can deliver higher returns than the broader market
  • With mid-caps, it is usually a stock-specific story
  • They are inherently more volatile than large-caps
  • Ideally, they should not be a part of the core portfolio
The IDFC Premier Equity Fund, for instance, focuses on emerging companies and has allocated more than 70 per cent to mid-caps and nearly 10 per cent to small-caps. These companies are significantly more nimble in their operations and because of a low base, they grow much faster, says Kenneth Andrade, Head of Investments at IDFC Mutual Fund.

IDFC Premier Equity has delivered a 52 per cent return in the past one year, outperforming the diversified equity category by 22 percentage points and the Sensex by 31 percentage points.

Similarly, the Magnum Emerging Business Fund has delivered a 51 per cent return in the past one year. Its top holding, Page Industries, has had a 30 per cent compounded annual growth rate in the past five years. The stock has risen from Rs 481 in January 2008 to Rs 1,240 now.

Another key stock in its portfolio, Manappuram General Finance and Leasing, has seen a 700 per cent appreciation since January 2008, while Eicher Motors is up 200 per cent.

Many of the mid-caps in fund portfolios have competitive valuations and can deliver higher growth compared with the broader market. Currently, the average return on equity, or RoE, for the Sensex companies is 18-20 per cent, whereas stocks like Rallis have an RoE of 30 per cent, which is available at 15 times its 2011-12 projected earnings, says Sageraj Bariya, Analyst (Mid-cap) at Angel Broking. Even the current price to earnings ratio of the BSE Mid-cap Index stands at 21 times compared with 24 times for the Sensex.

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