Risky, But Rewarding Too

Infosys, that was started in July 1981 with an initial investment of Rs 10,000, is today one of the global leaders in the IT industry with a market cap of nearly Rs 1.18 lakh crore. And Google, which was started in a garage, is today a USD 142 billion market cap company. However, it’s a tough task of selecting such companies out of the thousands that are listed, though it’s truly rewarding. But one can invest in a small and mid-cap fund and leave this tough job in the hands of professionals.

On a YTD basis, when the BSE Sensex index rose by 59.60 per cent, the BSE small and mid-cap indexes rose by over 71 per cent each. Such a performance aided the small-cap and mid-cap funds to outperform the general category. Even this fund, that yielded returns of 74.82 per cent on a YTD basis, managed to beat the category returns by 1,858 basis points. However, it’s more of the fund’s consistency that has made it stand out from the other peer funds. Launched in 2005, this fund is a multi-cap fund that focuses on the mid and small-cap stocks with a stipulated investment of at least 65 per cent of assets in these companies.

The balance 35 per cent is invested in the large-cap stocks so as to provide stability to this otherwise volatile fund. Such funds have higher asset turnovers and, in turn, higher cost. In July 2009, the fund seemed to be diversified, wherein out of its portfolio of 50 stocks its top ten holdings contributed 34.70 per cent of its total[PAGE BREAK] assets. Sectors such as engineering, FMCG, and metals together contributed 42.10 per cent of the assets. And out of the 20.70 per cent invested in the FMCG sector, about 12 per cent was invested in sugar stocks. In fact, the top two stocks were Renuka Sugars and Balrampur Chini. The rising realisation for these sugar companies in the upcoming quarters bodes well for the fund.

Over last few months the fund has reduced its exposure in the large-cap stocks and for July almost 85 per cent of the fund was invested in the small and mid-cap stocks, thereby taking the portfolio volatility and risk to a higher level. According to the fund manager, this was on account of a rise in the risk appetite as well as valuations in these segments as compared to the large-cap category. The cash and equivalent that stood at about 10 per cent of the total assets was mainly due to the fresh inflows into the fund.

Since Oct. 2006, S Krishnakumar, who manages this one fund at Sundaram, has significantly managed to beat the category returns. In the three and one year periods the fund has beaten its category returns by 729 and 1,060 basis points. However, because of its preference for small and mid-cap sectors it carries higher beta and risk than other funds with a strong bias for large-cap funds. Consequently the fund will rise more in good times and fall harder during the bad times as compared to large-cap funds. Thus, high risk investors can take a limited exposure to this fund.