Mid cap segment is expected to outshine other segments in the coming months. They are also better poised to ride the economic recovery wave than the small caps. That said, only quality names in midcap segment available at fair valuations can be expected to bounce back.

In this scenario, investing in a well-managed midcap fund that lays emphasis on quality stock-picking and risk management is a wiser bet than investing in individual midcap stocks to gain from the expected growth.

DSP Midcap Fund (DMCF) is one such midcap fund that invests predominantly in midcap companies with consistent earnings and significant growth potential.

The fund was launched in November 2006 and it currently manages assets worth Rs 6,957 crore. It is managed by Mr Vinit Sambre (since July 2012) and Mr Resham Jain (since March 2018), while Mr Jay Kothari is the dedicated fund manager for overseas investment.

Graph 1: Growth of Rs 10,000 if invested in DSP Midcap Fund 5 years ago

Graph 1: Growth of Rs 10,000 if invested in DSP Midcap Fund 5 years ago

Data as on January 28, 2020
(Source: ACE MF)

DMCF’s performance in the last five years has been healthy. If you had invested Rs 10,000 in DMCF five years back on January 28, 2015, it would have grown to Rs 17,442 (as calculated on January 28, 2020). This translates into a compounded annualised growth rate of 11.8%. Conversely, a simultaneous investment of Rs 10,000 in its benchmark Nifty Midcap 100 – TRI would now be worth Rs 14,564 (a CAGR of 7.8%). In the last five years, the fund has registered significant lead over the benchmark, especially in the last couple of years, generating an alpha of around 4 percentage points.

Graph 2: DSP Midcap Fund’s year-on-year performance

Graph 2: DSP Midcap Fund's year-on-year performance

*YTD as on January 28, 2020
(Source: ACE MF)

Launched in November 2006, DMCF has a track record of over 13 years to its credit. The year-on-year performance comparison of DMCF relative to its benchmark Nifty Midcap 100 – TRI shows that the fund outperformed the index in 8 out of last 10 calendar years. DMCF lagged the benchmark only in the momentum driven midcap rally of CY 2017, whereas in CY 2015 its performance was nearly in line with the benchmark. The fund has not only done well during bull phases but has also adeptly contained the downside risk when markets have been under pressure. In the last couple years when the midcap segment witnessed high volatility, the fund managed to gain clear lead over the benchmark, generating superior returns for its investors.

Table: DSP Midcap Fund’s performance vis-a-vis category peers

Scheme Name Corpus (Cr.) 1 Year (%) 2 Year (%) 3 Year (%) 5 Year (%) Std Dev Sharpe
Axis Midcap Fund 4,141 8.12 11.96 15.47 15.24 12.92 0.24
Invesco India Midcap Fund 674 1.55 5.35 12.55 15.31 15.23 0.13
L&T Midcap Fund 5,992 -5.02 0.05 12.38 16.37 15.54 0.09
Sahara Midcap Fund 8 0.92 0.39 12.00 13.04 15.96 0.07
Kotak Emerging Equity Fund 5,888 1.33 2.56 11.69 17.32 15.25 0.11
DSP Midcap Fund 6,957 1.56 2.43 11.66 15.52 14.94 0.09
Tata Mid Cap Growth Fund 773 4.47 3.04 11.14 14.51 16.66 0.10
Nippon India Growth Fund 6,844 1.62 2.75 11.07 12.41 14.91 0.10
Taurus Discovery (Midcap) Fund 50 -4.30 1.77 10.90 13.36 15.60 0.09
Edelweiss Mid Cap Fund 935 -3.30 2.07 10.56 14.95 16.09 0.09
ICICI Pru Midcap Fund 1,875 -2.86 1.10 10.42 13.08 14.77 0.05
Franklin India Prima Fund 7,583 0.01 2.50 10.37 15.19 13.51 0.07
HDFC Mid-Cap Opportunities Fund 22,796 -3.64 0.58 10.15 14.32 15.31 0.04
BNP Paribas Mid Cap Fund 754 -0.99 -1.08 8.33 13.37 16.01 0.07
Baroda Mid-cap Fund 46 -5.33 -0.60 7.96 2.66 15.36 0.02
Sundaram Mid Cap Fund 5,901 -5.90 -2.55 7.57 13.57 15.63 0.01
Motilal Oswal Midcap 30 Fund 1,812 1.54 0.56 7.15 14.13 16.21 0.04
Aditya Birla SL Midcap Fund 2,371 -6.93 -3.36 7.05 12.55 15.95 0.01
Quant Mid Cap Fund 11 -3.54 3.06 6.58 7.80 13.51 0.05
UTI Mid Cap Fund 3,715 -6.30 -1.79 6.28 12.05 16.12 0.02
Nifty Midcap 100 – TRI -7.47 -3.00 7.71 11.43 18.21 0.02

Returns are on a rolling basis and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on January 28, 2020
(Source: ACE MF)

*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

DMCF outperformed the benchmark and category average across rolling period. The fund’s outperformance over the category average has been in the range of 1-3 percentage points while when compared to the benchmark the outperformance has been in the range of 4-9 percentage points.

The fund stood among the top performers on a 1-year and 5-year rolling return basis whereas on a 2-year and 3-year rolling return basis it stood ahead of many of its category peers. Axis Midcap FundInvesco India Midcap FundL&T Midcap Fund and Kotak Emerging Equity Fund were the top performers during the period.

In terms of risk-return profile, DMCF’s volatility has been lower than the benchmark and category average. Its risk-adjusted returns have been better than the benchmark, though nearly in line with the category average.

Investment strategy of DSP Midcap Fund

DMCF invests predominantly in equity and equity related instruments of midcap companies. The fund adopts bottom-up approach to seek both growth and value stocks. Value is discerned when the fund manager believes that the long term growth potential of a company is not fully reflected in the market price of the company’s securities. While picking stocks for the portfolio, the fund gives consideration to low price-to- earnings, price-to-book, and price-to-sales ratios, as well as growth, improving margins, asset turns, and cash flows, amongst others.

It seeks to benefit from growth in stocks which could be due to a new product, a new process, growing market share, stronger brand equity, technological breakthrough and unique position in a market, among other factors. The fund endeavours to pick stocks which could become potential leaders in their respective fields in the future.

Graph 3: Portfolio allocation and market capitalisation trend in DSP Midcap Fund

Graph 3: Portfolio allocation and market capitalisation trend in DSP Midcap Fund

Holding (in %) as on December 31, 2019
(Source: ACE MF)

Categorised as midcap fund, DMCF is mandated to invest at least 65% of its assets in equity and equity related instruments of mid cap companies. The fund’s allocation towards midcaps has been the range of 65-71% in the last one year. The fund also seeks opportunities in large and small caps. In the last one year the fund significantly reduced its exposure to the high risk small caps from 17% to 6%. At the same time allocation towards the more stable large caps was hiked to around 21% from 8%. The fund’s cash holding in the last one year averaged 8.2%.

Graph 4: Top portfolio holdings in DSP Midcap Fund

Holding (in %) as on December 31, 2019
(Source: ACE MF) 

As on December 31, 2019, DMCF held a diversified portfolio of 50 stocks. The top 10 stocks constitute 32% of its portfolio. DMCF avoids taking concentrated bets with no individual stock having exposure of more than 4%. Divi’s Laboratories has the highest stock allocation of 3.7%, closely followed by Jubilant FoodWorks at 3.4%, City Union Bank and Ipca Laboratories at 3.3% each, HDFC Bank and Exide Industries at 3.2% each, among others.

In terms of sectors, the fund has the highest exposure to Engineering with an allocation of 13.2%, followed by Pharma at 11.6%, Auto ancillaries at 11.2%, Consumption at 10.3% and Banks at 8.3%. The other prominent sectors include Finance, Chemicals, Fertilisers, Consumer Durables, Cement, Infotech, etc.

Top contributors

Among the stocks in the portfolio, Mannapuram Finance contributed the most to the fund’s gains in the last one year with a weighted return of 2.6%. The fund also gained from its holdings in SRF Ltd., PI Industries, Ipca Laboratories, Divi’s Laboratories, City Union Bank, The Ramco Cements, Voltas, Jubilant FoodWorks, Max Financial Services, among others.

On the other hand stocks like Exide Industries, Sterlite Technologies, Cummins India, Emami, Apollo Tyres, etc. eroded some of its gains.

Suitability of DSP Midcap Fund

DMCF has rewarded investors well in the past generating decent risk-adjusted returns as compared to its benchmark and category peers. The fund holds a diversified portfolio of stocks across market capitalisation and sectors to avoid concentration risk. However, being midcap oriented the fund may be prone to higher volatility. Midcap funds can help you create long term wealth, though the risk involved is higher. This makes DMCF suitable for aggressive investors with investment horizon of at least 5 years.

Note:  This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This article first appeared on PersonalFN here

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