Infrastructure and mid cap funds have delivered 71% and 62% absolute return over a one year period.
With the expectations of pro-reform budget and subsequent revival in economic activity, fund houses are promoting their infrastructure and mid cap funds in a big way under the hope that they are best placed to capture the imminent rally. Indian markets are up 22% since January and the wide spread expectations are that the rally will continue further.
Infrastructure and mid cap funds have topped the performance chart by delivering 71% and 62% absolute return over a one year period, shows Value Research data.
Schemes like HDFC Infrastructure Fund, Religare Invesco Infrastructure Fund, L&T Infrastructure Fund, Escorts Infrastructure and Birla Sun Life Infrastructure Fund have delivered over 70% return during a one year period.
The performance of mid cap funds has been even more mouthwatering. Schemes like Reliance Small Cap Fund, HSBC Midcap Equity Fund and Birla Sun Life Pure Value Fund have delivered over 100% return during the same period.
To attract investors in these funds, some fund houses are paying upfront commission of 2-3% and a trail of 2.25% in such funds, say fund officials.
Distributors say that it is the smaller fund houses which are paying higher commissions on infrastructure and mid cap funds. “Small funds can charge a higher expense ratio and thus have the leeway to pay more. Large funds on the other hand can’t do so. You are paid 10-20 basis extra if you give bulk transactions in certain infrastructure and mid cap funds,” said a Mumbai based distributor.
Some fund officials said it’s a worrying trend. “Mid cap and infrastructure funds are being pushed aggressively by AMCs. The stocks are riding on hope that the finance minister make positive announcements. What is worrying is that large distributors like banks and wealth management firms are aggressively pushing sector funds,” said the sales head of a foreign fund house.
To mitigate risks, fund managers say that investors should commit at least five years to infrastructure funds. “The infrastructure stocks have run up on the expectations that the government will take some tough decisions which will help accelerate decision making and clear projects which are stuck. Despite the run up in mid and small cap stocks, there are still opportunities in this space. Mid-caps will always give good return over a long term period but with some amount of volatility,” said Soumendra Nath Lahiri, Head – Equities, L&T Mutual Fund.
Financial advisors say that’s it’s advisable to take some exposure to infra and mid cap space but the allocation has to be tactical.
“Fund houses are pitching infrastructure funds on the hope that Modi government will take positive steps to revive the infrastructure sector. The infrastructure sector is in a consolidation phase. If the government indeed takes some pro-reform steps then infra funds can deliver 20% returns year on year basis. However, one should allocate only 10% of portfolio to infrastructure. Even diversified funds can increase their allocation to infrastructure space which can result in over allocation to this sector,” said Nikhil Kothari of Etica Wealth Management.
Apart
from infrastructure funds, mid and small cap funds are also in the limelight
and are expected to perform better going ahead. “Some mid cap companies are yet
to see their performance improve. Many of the mid cap stocks which are part of
CNX Mid Cap Index are market leaders and command an economic moat. If there is
any upside in the economy the mid-caps tend to gain as well. There is still
some upside left in the mid and small cap space,” said Anubhav Srivastava, Sr.
Vice President and Fund Manager, Motilal Oswal Mutual Fund.
