Betting big on Indian mid-cap companies, the IDFC Mid-Cap Fund, launched on July 28, 2022, promises long-term risk-adjusted gains to investors.
The IDFC Mid-Cap Fund NFO (New Fund Offer) closes on Aug 11, 2022.
Here we look at some of the key features of the IDFC Mid-Cap Fund and why the Fund is betting big on mid-cap companies.
The mid-cap segment is among the fastest growing business sectors in India, logging returns higher than the large-cap sector over a period of three-year, five-year, and 10-year.
For instance, the five-year CAGR of mid-caps was 16.9 per cent, versus 11.6 per cent for large-caps in the same period as of June 30, 2022. Likewise, the 10-year CAGR return for the mid-cap segment was 17.2 per cent, compared to 11.4 per cent CAGR for the large-caps, according to ICRA MFI data.
Past performance of the segment shows that midcaps have relatively higher risk-adjusted returns, although the same may not sustain in the future.
The IDFC Mid-Cap Fund is an open-ended equity scheme focused on mid-cap stocks.
The Fund seeks to emphasize on management quality, competitive positioning, scalability, earnings trajectory, past financial history, valuation, and sectoral benchmark while investing in mid-cap assets.
These aspects are aimed at ensuring “optimal return on invested capital and clear value proposition for customers,” the company said in a handout. Also, the capital efficiency, strong franchise network, sustainable business model, and long-term earnings potential would be critical in its selection.
The Fund said that it aims at a “disciplined approach” for portfolio construction.
Its primary focus would be on mid-caps but will have the flexibility to allocate resources in the large-cap and small-cap segments in a 65:35 ratio, which is expected to ensure diversification, better risk-reward opportunity and investment proposition and improved liquidity of the portfolio.
The fund also seeks to tap the new sectors in the midcap segment, which have higher weightage, to generate long-term capital appreciation.
According to the Fund, the minimum application amount is Rs. 5000 and thereafter, in multiples of Rs 1.
Moreover, those who switch out within one year from the date of allotment, one per cent of the net asset value (NAV) will be applicable. But if redeemed after a year, no charges will be applied.
The IDFC Mid-Cap Fund will track the benchmark S&P BSE 150 Mid-Cap Index.
Investors looking for a diversified portfolio for a long-term hold, the IDFC Mid-Cap Fund could be one of the options. The IDFC AMC’s current market exposure is Rs. 4,500 crore, covering 35% of the total midcap stock segment.
A cursory glance at the mean return of the mid-cap sector against the large-cap segment offers a positive outlook.
Large-cap’s mean return (annualized average monthly returns) was 13.68 per cent compared to mid-cap’s mean return of 20.94 per cent in the last three years ended on June 30, 2022, as per data from Value Research, a financial advisory firm.
Additionally, the large-cap’s standard deviation (the performance range of an investment) was 21.84% compared to mid-cap’s 25.28%.
The Sharpe ratio (measure of risk-adjusted returns) for large-cap was 0.47 per cent, while mid-cap’s Sharpe ratio was 0.69. Thus, the data shows mid-caps scored better on these aspects, generating relatively higher returns despite the risks.
Besides, the mid-cap segment offers diverse sector-wide opportunities with the participation of new sectors and growing market capitalisation, rising at a CAGR of 18% to 39.28 lakh crore between June 2019 and 2022, compared to the large-cap index’s 16% CAGR, as per data from Motilal Research.
