A stable player in the mid-cap space

Investing in mid-cap funds has been popular with investors for some time now. That these funds offer above-average growth potential is widely acknowledged, though a point glossed over is that this growth potential comes at a price, i.e. higher risk.

Sundaram BNP Paribas Select Midcap Fund (SSM) has been among the better performing funds in the category.

What the scheme offers
SSM was launched in July 2002, a few months before the rally in mid-caps was triggered. After Franklin Prima Fund (which was launched way back in December 1993), SSM was the first mid-cap fund to be launched in the market.

Mid-cap stocks tend to be under-researched, thereby providing an investment opportunity that is yet to be identified by the stock market. For this reason mainly, investments in such companies (provided they are well-managed) offer higher growth potential and the opportunity for investors to clock above-average returns over the long-term (which in our view is at least 5 years for mid-caps).

On the flipside, mid-sized companies being under-researched may lull investors into overlooking some reasons for “not investing”. As risk control measures and corporate governance in many mid-caps are lax, the chance of manipulation in such companies is higher. Similarly, there is a possibility that the stock is illiquid even after considerable time, making it an unviable proposition for the fund manager.

Performance vs peers’
We have considered funds that predominantly invest in the mid cap segment. Further, only funds which have been in existence for at least 5 years have been chosen. It should be noted that the benchmark index of SSM is BSE Midcap. However, since the same is not commonly available in public domain, we have taken a comparable index, i.e. CNX Midcap, for evaluation.

It is evident from the table that SSM has pitched in an impressive performance on the net asset value (NAV) appreciation front vis-à-vis peers. Over the five-year timeframe, it has clocked an impressive return of 66.4% per year. The fund has also successfully outperformed the CNX Midcap over the long-term.

Volatility
Standard deviation (SD) is a measure of the volatility in a mutual fund’s performance — a lower SD denotes lower risk. SSM emerges as the best performer on the volatility control front with a SD of 6.72% (the lowest in its peer group) implying its investors have been exposed to lower risk vis-à-vis peers. Reliance Growth (7.18%) is the most volatile fund.

Risk-adjusted return
Sharpe Ratio (SR) evaluates how well the mutual fund has compensated investors for the risk borne. For this purpose its returns are compared with those of a risk-free instrument. The higher a fund’s SR, the better is its performance on the risk-adjusted return front. SSM (Sharpe Ratio 0.48%) delivers a competent performance on the risk-adjusted returns front as well to emerge as the top performer.

The above graph bears testimony to SSM’s good showing as compared with the CNX Midcap. An investment of Rs 100 in SSM at inception (July 2002) would have grown to Rs 1,270.6 by November 22, 2007.

Had the same amount been invested in the CNX Midcap, it would have appreciated to Rs 790.0.

Fund management
One of the more commendable traits of SSM is a process-driven investment style that makes it relatively indifferent to the absence/ presence of a star fund manager. That is mainly why, even the exit of a competent fund manager like Anoop Bhaskar has not dented its performance. Some recent changes in the fund’s investment style include

A willingness to be fully invested most of the time, and
A leaner portfolio (i.e. fewer stocks).

Should an investor consider investing in the fund? Well, that would depend on his risk appetite, investment objective and existing portfolio, among a host of other factors.

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