More Risk, More Gain

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Of late, the mid-cap funds have outperformed the plain vanilla large-cap diversified funds and that is because the mid-cap stocks have outperformed the large-cap ones. Since March 2009, the BSE Sensex index has moved up by 90.72 per cent, while the BSE mid-cap index has surged by 123.84 per cent. In the same period, this fund has managed to outperform its benchmark index (CNX mid-cap) by a massive 1,726 basis points which has helped the fund to currently trade at its 52-week high NAV of Rs 91.23.

Launched in October 2002, the fund has managed to beat the average category in every calendar year, except for CY08. Such consistency has helped this fund to outpace its category returns by 1,555 and 678 basis points in one and three-year periods respectively. The fund is one of the best performers in the three-year period, while it is the second best among its mid-cap peer funds. However, such outperformance over the years and underperformance in the last year is attributable to the fund’s asset allocation pattern.

As per the mandate, over 95 per cent of the assets are almost always invested in equities i.e. it doesn’t take any cash calls and it primarily stays invested in equities - that too in mid-cap and small-cap stock. However, the fund can invest up to 35 per cent of its corpus in the large-cap stocks that lowers the portfolio volatility. In August 2009, almost 90 per cent of the equity portfolio was invested in the mid-cap and small-cap stocks with an investment style that was largely growth-biased. For the 50-stock well-diversified portfolio, its top ten holdings contributed a mere 28.31 per cent of the total. In fact the maximum allocation to a single stock is limited to 3.15 per cent.

Further, its sectoral allocation seems quite diversified and defensive considering that the top three sectors contributed just 26.62 per cent. While sticking to its mandate, the fund had cash and equivalent that stood at a minuscule 4 per cent of the fund. Such market cap allocation highly increases the beta or volatility of the fund, while the higher equity concentration increases the fund’s risk. However, the fund’s defensive sectoral and stock allocation slightly reduces this risk.
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Sanjay Chawla has been managing this fund since the last two years and he has managed to beat the category returns by over 422 basis points. It was the second best performer in the mid-cap fund segment. Chawla has over 13 years’ experience in equity research and prior to joining Birla Sun Life (BSL) AMC he has worked with various broking houses in the same position. At BSL, he also manages other three funds. However, all these funds haven’t managed to beat their category over the long-term period. That aside, this fund has done remarkably well.

It wouldn’t be wrong to say then that this fund will be among the top performers during bull runs. However, it will fall harder during the downturns as compared to funds biased towards the large-cap stocks. Thus we would recommend high risk investors to consider limited exposure to the fund.