What is causing the rally in mid-caps and do you think this rally will sustain?
The strong historical outperformance of mid-caps is causing investors to incrementally allocate higher capital to mid-cap oriented stocks and funds. This may be the reason for its continued outperformance as it is being backed by flows. Mid-caps, as a category, are trading at a premium to the large caps and valuations are looking a bit stretched currently. This may lead to some correction in the near term. However, we continue to remain bullish on the long term prospects of the mid-cap segment.
What risk mitigation strategies have you deployed in your mid and small cap funds?
The biggest risk emanates from faulty selection of companies. Since many companies in this category are not well researched and well covered, the information availability is poor. Hence, our skill set of identifying the stock and understanding of the management becomes very important. We try to minimize the risk by following a sound investment strategy for our funds.
Our investment philosophy is to build a portfolio of companies having strong business fundamentals and superior future outlook. We would ideally like holding these names for long periods of time. We follow a bottom-up stock selection approach where focus is on quality management, cash flows, ROCE and companies having competitive advantage.
Within the mid & cap segment, which sectors are you bullish on?
We are currently bullish on speciality chemicals, textiles, NBFCs, pharmaceuticals and consumer discretionary sectors.
Investors generally invest by looking at past returns. Many investors would be tempted to take exposure to mid-cap stocks through MFs. What would be your advice to them?
I think over exposure to mid-caps is not desirable. One should always stick to asset allocation based on one’s risk taking ability. I definitely hold a positive view on the small and mid-cap category and believe in their long term ability to deliver better returns than large caps, but switching 100% of one’s portfolio into mid caps is not prudent.
How have been the inflows in your mid and small cap funds over the past six months? Are you finding value in market at the current valuations?
Yes, we are witnessing inflows in our mid and small cap funds. As I just mentioned, the sharp run up in mid & small cap companies in the last two years have pushed their valuations in slightly expensive zone. Though we are able to find good businesses to look at with a longer term horizon, we are not comfortable with current valuations, which is limiting our ability to build decent sized positions. We are restricting flows to a certain amount which we feel is appropriate.
Which is a better approach to investing in mid and small cap funds – SIP or lump sum?
I feel SIP makes lot of sense as it takes away the risk of timing the markets while deciding about the investment.
