MFs rush to sate midcap appetite

Tags: News
Fund houses feast on what equity investors fancy.

Domestic mutual fund houses are rushing to launch schemes focused on midcap and smallcap stocks to cater to equity investors’ growing appetite for mid-rung stocks, which are on a high over the past few months on hopes of economic revival.

Like most new fund offerings of recent months in the diversified equity fund category, these schemes are close-ended, meaning one can invest in them only during the NFO period.

Three fund houses filed draft offer documents for eight such schemes with market regulator Sebi over the past two weeks. Draft papers were filed on Monday for two schemes, ICICI Prudential smallcap fund and Sundaram select smallcap- Series II-IV. Four close-ended smallcap-focused funds and one close-ended mid-and-smallcap scheme have been launched over the past six months, of which only two are now open for subscription.

“Midcaps and smallcaps are risky categories. There is a wide range of companies in these segments and only a handful of them perform, the rest don’t. Choosing a good pool of companies is a big challenge and coming up to investors’ expectations is an even bigger task for fund managers,” said Nilesh Sathe, CEO of LIC Nomura Mutual Fund.

ICICI Prudential’s draft papers said the smallcap fund would be a close-ended equity scheme, which will try to achieve capital appreciation by investing mostly in smallcap stocks. “A minimum of 80 per cent of the corpus will be invested in equity or equity-related instruments of smallcap firms (rest to fixed income products or equities),” the fund house said.

The scheme has tenures of three to five years. It will automatically get converted into an open-ended scheme at the end of the tenure. The Sundaram scheme too offers tenures of three to five years.

V Balasubramanian, head of equities at IDBI Asset Management, said midcap and smallcap stocks were just playing catchup with their largecap peers, which have gone up sharply over the past eight months. The benchmark equity index, Sensex, has gained six per cent this calendar while BSE midcap index is up 10 per cent and the smallcap index 15 per cent.

“There is a strong belief that midcap firms that have strong balance sheets may perform well going ahead as the economy shows the green shoots of growth and a stable government comes to power. In case there is a fractured verdict in the election, the chances of a speedy recovery will reduce and the midcap and smallcap-focused schemes may suffer,” Balasubramanian cautioned.

L&T Emerging Business Fund, a midcap-focused scheme, is open for subscription till May 6. The new fund offer of Birla Sun Life Emerging Leaders, another midcap-focused scheme, closes today.

Subramanian said portfolio allocation is key in such funds and investors should look at it closely. “Investors should first gauge their risk appetite, as unlike largecap-focused schemes, which may deviate from their benchmarks by not more than 1-2 per cent, midcap and smallcap schemes can see strong volatility if not managed properly,” he said.

Sathe advised first-time investors to stay away from such products. “These funds are mostly broker-driven, and high upfront and trail commissions are their driving force,” he said. LIC Nomura Mutual Fund does not have any plan to launch midcap or smallcap-focused schemes.

There were 44 midcap or smallcap-focused open-ended schemes as of Tuesday, data from with mutual fund database NAVIndia showed. Among them, 39 are at least five-year old and have given an average compounded annual rate of return of 22.90 per cent during this period. There is no close-ended midcap-focused scheme right now.

In open-ended schemes, an investor can buy or sell units at any point of time at the net asset value (NAV) declared by the fund. On the other hand, a close-ended scheme can be bought only at the time of the NFO and investors can exit only on maturity. Closed-ended schemes are listed on the stock exchanges, where investors can sell them to exit before term. But liquidity is near absent on this platform.


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