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India’s mid-caps benefit from raging bull market

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Investing in India's mid-caps

2021 has been a great year for India’s equity market, especially for the mid-cap funds – a favourite for seasoned investors. The Indian equity market is dominated by companies from the mid-cap segment, which consists of listed companies that have a market capitalisation of around $657 m to $2.6 bn. Therefore, this segment has benefitted tremendously from India’s policy prescription, broad-based economic recovery and a raging bull market of more than a year.

This year, India’s mid-cap segment has had an edge over large caps on the back of their earnings potential and an advantage over liquidity premium. According to the Bulls & Bears report by Motilal Oswal Financial Services (MOFSL), India’s mid-caps have outperformed large caps over the last 12 months. Not only that, but mid-caps have risen 50% against a 31% rise for the Nifty, during the same period. In Price/Earnings (P/E) terms, the Nifty midcap 100 is trading at a 14% premium to the Nifty, as per Motilal Oswal calculations.

As mid-caps offer risk moderation and substantial returns, the segment has become very popular with retail investors. This is due to the fact that mid-caps stocks tend to claim less volatility and risk as compared to small-cap stocks and offer long term competitive advantage and greater potential for growth when compared to large-cap stocks. They also have the ability to turn into large-cap companies in the long run, offering better growth valuations. With India’s economy improving, global fund managers have also picked up interest in selective mid-cap stocks, where the growth rate has been more sustainable.

And now with the broader equity market pullback in India, economists are anticipating more growth prospects for the mid-cap space, thus providing attractive opportunities for investment. HSBC analysts suggest that Indian mid-caps will likely lead the growth in 2022, particularly in the IT sector.

Kotak Funds – India Midcap Fund

Investors looking to leverage India’s long-term economic trajectory can focus on mid-cap concentrated funds, that holds some of the fastest-growing companies in India.

One such fund strategy is Kotak Funds – India Midcap Fund (ISIN: LU0511423229), which offers investors an option to invest in quality mid-cap companies from India. Targetting long term capital appreciation, the UCITS fund primarily uses a bottom-up approach. The India Midcap fund invests at least two-thirds of its total assets (excluding cash) in equity and equity-linked securities of Indian mid-capitalisation companies. It also has the flexibility to invest up to a third of its assets in equity and equity-linked instruments of large-capitalisation companies.

Launched on 25 April 2017, the Luxembourg domiciled fund is actively managed by the Singapore based principal investment manager Nitin Jain, since 25 May 2010 and by fund manager Ankit Sancheti, since 01 July 2011. Where Nitin runs equity funds with a growth investment style, Ankit focuses on managing growth, midcap, infrastructure and concentrated strategies.

The fund managers are expected to pick companies that have one or more of these characteristics such as the ability to create new markets, a presence in niche segments, the potential to grow rapidly due to innovation and IPR development. These listed companies should also have the potential to witness operational and financial improvement due to an upswing in business cycles and should be strong asset plays and sectoral leaders.

With 94% equity allocation, the midcap fund has risen by 42% since the beginning of the year. It has generated returns of 44% in 1 year and 15% in 3 years. However, the returns have declined by 6.5% in the last one month period*. 

Sector-wise, the fund is mostly allocated in Industrials (21%), Financial Services (20%), Raw Materials (17%), Consumer Cyclical (11%), Healthcare (9%) and Technology (8%). With a fund size of $1,685.59 m*, the running costs of the fund are 1.27% p.a.

The top 5 holdings of the midcap fund include Indian multinational technology services company Persistent Systems Ltd (3.7%), multi-business chemicals conglomerate SRF (3.47%), IT services company Mphasis (3.01%), housing finance firm AAVAS Financiers (2.84%) manufacturers of consumer products Crompton Greaves (2.36%), who together constitute 15.38% of the total holdings**.

Other holdings include financial and investment service provider Cholamandalam Investment (2.34%), commercial bank AU Small Finance Bank (2.25%), multinational electronics company Voltas (2.21%), The Federal Bank (2.20%) and private life insurance company Max Financial Services (2.15%).

 

 

* As of 17 December 2021

** As of 20 December 2021