Even though the small and mid cap companies are no longer market favourites, three more funds could be launched soon in this space. Recently IDFC Mutual Fund launched a three year close-ended IDFC Equity Opportunities Fund which invests in companies beyond the top 200 by market capitalization. At least three more fund houses have sought SEBI approval to launch their mid-cap funds.
Union KBC is also launching its Small and Mid-Cap Fund. The fund will invest in stocks with a market capitalization of less than that of the top 100th listed company on the Bombay Stock Exchange (BSE) constituting S&P BSE Midcap Index. The fund will predominantly follow a bottom up approach of stock selection.
Pramerica has filed an offer document with SEBI for its Pramerica Midcap Opportunities Fund. Axis Mutual Fund is also planning to launch its Axis Small Cap Fund. Axis already has an Axis Midcap Fund.
The S&P BSE Small Cap index delivered 33% return in 2012 and has corrected 18% from January 2013 till now. Similarly, the S&P BSE Mid-Cap index posted 39% returns in 2012 and has corrected 12% till now.
According to Value Research, the mid and small cap fund category delivered an average of 7% return over a one year period. There are over 50 small and mid-cap funds in the industry. In 2012, small and mid-cap funds were winners significantly outperforming large cap funds. Large cap funds posted average returns of 28% compared to average returns of 39% delivered by small & mid-cap funds.
Advisors recommend investing in mid-cap funds with at least a three year horizon. “Mid and small cap funds are available at heavily discounted valuations currently. Investors can invest in mid cap funds if they are ready to hold their investments for at least three years,” says Jayant Vidwans of Chaitanya Financial Consultancy.
Advisors say investing in a new open ended mid cap fund does not make much sense and investors should go for existing funds which have a track record. “IDFC Equity Opportunities Fund will pay out dividends compulsorily if it books profits. This is good; otherwise investors often lose money at the end of three year lock-in,” said Gajendra Kothari of Etica Wealth Management.
