HDFC Mid-Cap Opportunities Fund
Summary Report –
Benchmark: CNX Midcap
Min. Investment: Rs 5,000
Face Value: Rs 10
Entry Load: Nil
Exit Load: Nil*
Issue Opens: May 7, 2007
Issue Closes: June 8, 2007
* In case of premature withdrawal, proportionate unamortised issue expenses will be recovered from investors.
The investment objective of the Scheme is to generate long-term capital appreciation from a portfolio that is substantially constituted of equity and equity related securities of Small and Mid-Cap companies.
*Source: Offer Document.
Close-ended funds investing in stocks from the mid and small cap (capitalisation) segments have emerged as the season’s flavour. HDFC Mid-Cap Opportunities Fund (HMOF) from HDFC Mutual Fund is the latest addition to this list. A 3-Yr close-ended fund, it will be converted into an open-ended fund at the end of the stipulated period.
Mid cap companies tend to be under-researched ones, thereby providing an investment opportunity that is yet to be identified by the market.
Investments in such companies offer high growth potential and the opportunity to clock above-average returns over the long-term horizon.
However, since mid-sized companies are often under-researched, there is a fair chance that some reasons for “not investing” could be overlooked. As risk control measures and corporate governance tend to be neglected, the chance of manipulation in such companies is higher. Similarly, there is a possibility that the stock remains illiquid even after considerable time making it an unviable proposition for the fund manager.
As a fund house, HDFC Mutual Fund is known for its process-driven investment approach. The fund house has in its arsenal, a number of well-established funds like HDFC Equity, HDFC Top 200 and HDFC Prudence, to name a few. These funds have proven track records across time frames and market phases. While some of its existing funds do invest (a minor portion of their portfolios) in the mid cap segment, HMOF is the fund house’s maiden full-fledged venture in the segment. HMOF will benefit from the fund house’s expertise and process-driven investment approach.
HMOF with its mandate to predominantly invest in mid/small cap stocks will display the traits of a high risk-high return investment proposition. The fund will appeal to investors with a commensurate risk appetite.
Advice for investors – give the fund a miss for now, evaluate its performance over a 3-Yr time frame and based on the same, consider investing in it, when it turns open-ended. Also investor shall save on the initial expenses. Investors who wish to invest in a mid cap fund, should consider adding to their portfolios proven, open-ended, mid cap funds like Franklin Prima (36.0% CAGR and 47.6% CAGR over 3-Yr and 5-Yr respectively) and Sundaram BNP Paribas Select Midcap (52.5% CAGR over 3-Yr).
Portfolio Strategy :
Instruments Normal Allocation
Equity/equity related securities of small cap companies 5%-15%
Equity/equity related securities other than above 0%-25%
Debt and money market instruments 0%-25%
Stocks from the mid cap segment will account for 70%-95% of the fund’s net assets. Investments in small cap companies will account for 5%-15% of its net assets. HMOF is mandated to invest upto 25% of its corpus in stocks from the large cap segment. The fund house has indicated that both ‘growth’ and ‘value’ stocks will feature in HMOF’s portfolio. The bottom-up approach will be deployed for stock picking.
With a view to de-risk the portfolio, HMOF will invest in at least 25 stocks at any given time. The maximum investment in any small/mid cap stock will not exceed 10% of assets. Also the provision to hold upto 25% of net assets in debt and money market instruments can prove useful when the equity markets run into rough weather.
HMOF may also invest in ADR/GDR/Foreign Equity and Debt Securities in accordance with guidelines issued by SEBI and RBI. Investments in the aforementioned securities are unlikely to exceed 25% of the fund’s net assets in normal circumstances.
Fund Manager’s Profile
Mr. Chirag Setalvad, Senior Fund Manager http://www.hdfcfund.com/products/schemeShow.jsp?schemeId=342&fundID=1#fundManageris B.Sc. in Business Administration from University of North Carolina. Before re-joining HDFC Asset Management Company Limited in March 2007 (he had a stint with the AMC from July 2000-August 2004), he was associated with New Vernon Advisory Services Pvt. Ltd.
Mr. Anand Laddha, Assistant Manager-Equities http://www.hdfcfund.com/products/schemeShow.jsp?schemeId=342&fundID=1#fundManageris an A.C.A. He has been designated as the Dedicated Fund Manager for overseas investments. Before joining HDFC Asset Management Company in February 2006, he was associated with Refco-Sify Securities India Pvt. Ltd., among other organisations.
Given HMOF’s investment proposition, the fund’s fortunes will be closely linked to that of the mid/small cap segment. The 3-Yr close-ended tenure will aid the fund manager from the perspective of making long-term investments; this is important given that mid/small cap stocks can take longer time frames to deliver growth.
HMOF’s mandate to invest a portion of its corpus in large cap stocks, debt instruments and foreign securities can aid it from a diversification perspective, when the mid/small cap segment runs into rough weather.
Finally, only positive for the NFO is the fund house’s process-driven investment approach and expertise can hold HMOF investors in good stead over the long-term(3-4 yrs).