In these difficult market conditions and when there is lot of uncertainty and high volatility, funds that fall lower than the benchmark index, but have the potential to bounce back higher during recovery are the ones worth holding on to.

Many of you may panic and think of redeeming investments whenever there is high volatility in the market or if there is short-term underperformance in the fund. But you could, regrettably, miss out when the fund’s performance improves and rewards investors for their patience.

The market crash has impacted mid and small cap funds the most. That said, I believe that the midcaps have a high recovery potential due to attractive valuations and its better margin of safety.

Invesco India Midcap Fund (IIMF) is one such midcap fund that underperformed during the momentum driven rally, but stood strong during the recent market crash, which left many of its peers gasping of breath.

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

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

Data as on March 25, 2020
(Source: ACE MF)

IIMF witnessed prolonged underperformance from 2015 to 2017. However, the fund exhibited a turnaround since the market started correcting 2018 onwards. If you had invested Rs 10,000 in IIMF 5 years ago on March 25, 2015, it would now be worth Rs 12,080, whereas a simultaneous investment in its benchmark Nifty Midcap 100 – TRI would have dropped in value to Rs 9,433. Over the last 5 years, IIMF has appreciated at a CAGR of 3.9%, an alpha of 5 percentage points CAGR over the benchmark index. The recent impressive returns prove its ability to perform under pressure and potential to deliver superior returns in the long run.

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

Scheme Name Corpus (Cr.) 1 Year (%) 2 Year (%) 3 Year (%) 5 Year (%) 7 Year (%) Std Dev Sharpe
Axis Midcap Fund 5,193 9.44 11.19 15.28 13.48 18.59 15.85 0.11
Invesco India Midcap Fund 805 3.28 4.47 11.64 13.32 18.95 18.21 0.03
L&T Midcap Fund 6,213 -2.84 -1.72 10.63 14.10 19.31 18.94 -0.04
Sahara Midcap Fund 8 4.25 -0.15 10.38 11.74 17.13 19.03 -0.02
Kotak Emerging Equity Fund 6,848 4.30 1.88 10.33 15.17 18.81 18.80 -0.02
DSP Midcap Fund 7,458 4.47 1.88 10.28 13.75 18.14 17.72 -0.02
Tata Mid Cap Growth Fund 838 6.77 2.22 10.25 12.41 18.32 19.65 -0.01
Nippon India Growth Fund 7,154 4.06 1.79 9.96 10.83 14.08 18.46 -0.02
Edelweiss Mid Cap Fund 963 -0.11 0.41 9.63 12.73 18.57 19.90 -0.01
Taurus Discovery (Midcap) Fund 51 -1.82 0.43 9.61 11.52 15.16 18.34 -0.01
Nifty Midcap 100 – TRI -5.94 -4.68 5.81 9.52 12.23 21.82 -0.10

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 March 25, 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.

IIMF has generated outperformance in the range of 4-10 percentage points over the benchmark across rolling time periods; while compared to the category average, it is in the range of 2-5 percentage points.

IIMF stood among the category toppers across rolling time periods, except one year rolling period. Some of the other top performers were Axis Midcap FundL&T Midcap FundKotak Emerging Equity Fund, and DSP Midcap Fund.

The fund’s superior returns have come at a reasonable level of risk. Its volatility of 18.21 is lower than the category average and the benchmark. But its risk-adjusted returns as denoted by Sharpe is among the best in the category.

Investment strategy

Categorized as a midcap fund, IIMF seeks to generate long-term capital appreciation by investing in equity & equity related instruments of midcap companies. The fund utilizes the bottom up investment approach to select stocks and prefers to be benchmark agnostic.

While picking stocks, the fund managers look for stocks of companies with high growth potential. The fund invests about 65% to 75% in midcaps, with another 10% to 15% in small caps. It also holds a slight allocation of up to 10% in large caps.

IIMF follows process based investment strategy and strictly adheres to its mandate and investment philosophy.

Graph 2: Top portfolio holdings in Invesco India Midcap Fund

Holding in (%) as on February 29, 2020
(Source: ACE MF)

IIMF holds a fairly diversified portfolio of stocks across sectors. As on February 29, 2020, IIMF held 45 stocks in its portfolio with the top 10 stocks constituting over 33% of its assets. The top holdings of the fund include Coromandel International, Apollo Hospitals Enterprise, Cholamandalam Investment & Finance Company, Whirlpool of India, and Aditya Birla Fashion and Retail. No individual stock has allocation of more than 5% in the portfolio.

Stocks like Indraprastha Gas, Whirlpool of India, Ajanta Pharma, Mishra Dhatu Nigam, Gujarat State Petronet, Cholamandalam Investment & Finance Company, Coromandel International, etc. contributed the most to its gains in the last one year.

Among sectors, the fund is diversified across cyclicals and defensives. IIMF has the highest exposure to Finance stocks, followed by Consumer Durables, Pharma, Oil & Gas, Infotech, Auto ancillaries, Engineering, and Retail.

Suitability of Invesco India Midcap Fund

IIMF has performed well in the ongoing market crash at a reasonable level of risk. The fund holds a well-diversified portfolio of stocks and sectors with a focus on quality. Its small portfolio size may prove to be advantageous to manage portfolio during tough market conditions. However, its high allocation to mid-caps and small-caps makes it prone to higher volatility. This makes the fund suitable for investors with high risk appetite and investment horizon of more than 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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