Exposure to mid-, small-cap stocks helps MFs reap good returns

Mumbai: Focused exposure to mid- and small-cap stocks have enabled leading Indian mutual fund (MF) companies to generate around 50-to-100 per cent actual returns to their investors in the last one year.

Premier equity fund schemes such as Franklin India Prima, GIC Fortune, SBI Magnum Contra, Can Bonus and Reliance Vision have enabled the MF companies to offer above-market returns by bucking dull market conditions. This is despite the fact that equity schemes, as an asset class, have generated an average return of over 18 per cent (actual returns) as against the Bombay Stock Exchange Index of Sensex return of 0.93 per cent in the last 10 months.

“We were investing in select mid-cap stocks, mostly information technology and public sector unit [PSU] stocks, during the last one year; this has paid off considerably in posting over 40-to-80 per cent returns,” says a fund manager with LIC MF. “The mutual fund had invested in the PSU stocks like Nalco, Neyveli Lignite and Bharat Earthmovers, and the returns were more than 40 per cent.”

The mid-cap stock rally, which started in January 2002, was across the board and several stocks were appreciated substantially. Some of the stocks that have propped up the net asset values of equity schemes include Cosmo Films, United Phosphorus, India Gulf Fertilisers, BFL Software, Mastek, Tata Telecom, ABB, Concor and other small-cap companies.

Says Kotak Mahindra MF equity fund manager Vetri Subramanaym: “The restructuring and reengineering exercise carried out by mid-size companies during the recession period have helped them to give a new business model with an international focus. This prompted the MFs to invest in the stocks of such companies.”

Adds CanBank MF equity fund manager Umesh Kamath: “As far as the MF industry is concerned, the exposure in the mid- and low-cap stocks were very low for the last few years due to the risk associated with such stocks. But, since early 2002, Indian fund managers have started to focus more on the mid- and low-cap segment; these stocks have generated above-market returns though they are not long-term investment options.”