Ask Morningstar: Choosing from 5 mid-cap funds

By Kavitha Krishnan |  05-05-22 | 
 
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About the Author
Kavitha Krishnan is a Senior Research Analyst on Morningstar's Fund Research team. She has over 9 years of experience in the Financial Sector. She would like to hear from you, but cannot give financial advice.

I have a 10-year horizon. I want to start an SIP with midcap exposure. I have narrowed down on Axis Midcap, ABSL Mid Cap, HDFC Mid Cap Opportunities, Kotak Emerging Equity and Invesco India Midcap. From all of these, how must I make my pick? What are the factors one should consider when investing in a mid-cap fund?

All the mid-cap funds that you have picked stand out in their category. However, there are a few factors that you need to consider before investing in any fund.

Evaluate

You need to examine the different manager styles and look at how these fit in with your investing requirements. Each of the funds below are managed differently and have some marked differences in the way they are run. You also need to look at your risk appetite and match that with the levels of risks that the fund managers are taking. For example, if you are looking for a consistent performer with a relatively lower risk, the Kotak Emerging Equity or the Axis Midcap will suit your requirements. The HDFC Mid Cap on the other hand consists of a few illiquid stocks that could impact your returns.

Attribution analysis is the next step. This will need you to analyse the portfolio to tell you how the asset manager achieves performance. For example, the HDFC Midcap fund does not hold any exposure in the real estate, cement, and telecom sectors, and has not done historically. Having or not having exposure towards certain sectors could impact the how the fund performs across market cycles.

It would be a prudent decision to pick a fund based on your investing preferences.

Thirdly, I have no idea how many funds you choose to invest in, but if the SIP amount is significant, you could consider two funds. I mentioned this to a reader in Why 2 flexi-cap funds makes sense due to the distinct individual portfolios.

While you can read the views of analysts on select mid-cap funds here, here are my views on the funds you have chosen. 

Axis Midcap Fund

Managed by Shreyas Devalkar since November 2016. Devalkar looks at investing in quality growth stocks at reasonable valuations. The portfolio is a high conviction one where he only invests in stocks across sectors that he has a positive view on. For example, he invested in the Auto sector when it was doing well, however he exited entirely when the sector faced a downturn. He aims to realign the portfolio in line with the broader markets and this gives the fund a fair bit of predictability. Having said that the fund does tend to underperform in momentum driven markets like that of 2018 and 2021.

HDFC Mid-Cap Opportunities

Managed by Chirag Setalvad who has been with the fund house for a very long period. We hold the fund in high regard and think that the manager has the wherewithal to run the fund efficiently over the long term. Setalvad sticks to his high conviction ideas despite them being contrarian. He also allocates some portion of the portfolio towards tactical short-term bets with a view to generate additional alpha. The strategy typically invests in smaller companies as reflected by the fund’s average market cap versus its peers within the mid-cap category. Given his style of investing, Setalvad can tend to invest in slightly illiquid names his could lead to a less flexible exit strategy, especially in the unlikely event that the fund witnesses’ significant outflows. It’s also important for investors to be aware of the short-term performance blips that the fund could face owing to the manager’s investment approach.

Kotak Emerging Equity

Managed by Pankaj Tibrewal, a manager with an association with Kotak since 2010. Tibrewal aims to run a diversified portfolio with an aim to reduce liquidity risks and minimize the downside risk on the fund. The manager claims to be able to liquidate over 80% of the portfolio in less than a month. The manager looks at investing in long term growth stories and places a lot of focus on investing in high quality businesses that are unlevered. The team has remained consistent in this thought process, and this has worked to their advantage especially in momentum driven markets.

Invesco Midcap

Managed by Pranav Gokhale since March 2018. He has been with Invesco since 2008 and carries extensive experience as a research analyst. The fund has remained a consistent third quartile performer across a 1- and 3-year period and a second quartile performer across a 5-year period. The fund’s slight underperformance in 2019 and 2021 have impacted the fund’s cumulative performance over the long term. The manager’s style is such that he invests in quality businesses and typically holds around 4-5% in individual stocks. His portfolio typically consists of around 45-50 holdings. He runs a benchmark agnostic portfolio, with a lot of off benchmark stocks holding significant positions in the portfolio.

Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries relating to mutual funds, portfolio planning and personal finance. While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.

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Articles authored by Kavitha Krishnan

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Aravind Sankeerth
May 8 2022 01:09 AM
 Quant Large & Mid Cap
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