Welcome to  PersonalFN’s weekly analysis on diversified equity mutual funds! In this issue, we have analysed HDFC Mid-Cap Opportunities Fund, highlighting its performance, peer comparison, investment strategy, fundamentals, portfolio, and suitability.

HDFC Mid-Cap Opportunities Fund is a popular Mid Cap Mutual Fund that has recorded a strong revival in the last couple of years, thereby outpacing many of its peers and effectively reaffirming its position as a top-quartile fund over longer time periods.

What is the growth of Rs 10,000 invested in HDFC Mid-Cap Opportunities Fund five years ago?

Past performance is not an indicator of future returns
Data as of April 15, 2024
(Source: ACE MF, data collated by PersonalFN) 

Launched in June 2007, HDFC Mid-Cap Opportunities Fund is the most popular scheme in the Mid Cap Mutual Fund category. The fund has a mammoth corpus size of over Rs 60,418 crore, which is a noteworthy milestone, particularly for funds focusing on mid and small-sized companies. HDFC Mid-Cap Opportunities Fund has firmly established its position in the Mid Cap Fund category by delivering above-average returns across diverse market conditions, consistently positioning itself in the top-quartile performers over extended periods.

The fund has done well and flourished under the supervision of its fund manager, Mr Chirag Setalvad, who is known for his strong conviction in mid-cap and small-cap ideas. Notably, the fund manager resists following market momentum and holds each of his high-conviction stocks for the long term.

Over the past 5 years, HDFC Mid-Cap Opportunities Fund has delivered returns at a CAGR of around 24.3%, which is nearly in line with the returns generated by its benchmark Nifty Midcap 150 – TRI index. An investment of Rs 10,000 in HDFC Mid-Cap Opportunities Fund five years back would have now appreciated to Rs 29,705 compared to a valuation of Rs 29, 351 for a simultaneous investment in its benchmark.

Though a period of prolonged subdued growth between 2016 and early 2020 presented a challenge for the fund, it has bounced back strongly in recent years to restore its position among category outperformers.

How has HDFC Mid-Cap Opportunities Fund performed on a rolling return basis?

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
Quant Mid Cap Fund	5,873	34.29	24.92	39.35	26.50	21.89	17.62	0.47
Motilal Oswal Midcap Fund	8,987	35.36	27.69	37.65	22.59	17.96	16.26	0.48
HDFC Mid-Cap Opportunities Fund	60,418	38.98	24.24	33.79	20.40	18.23	14.88	0.44
Nippon India Growth Fund	24,796	35.59	21.27	33.10	21.87	19.03	15.86	0.40
SBI Magnum Midcap Fund	16,856	27.41	18.82	32.90	20.95	16.04	14.32	0.36
Mahindra Manulife Mid Cap Fund	2,202	36.61	19.91	32.20	21.61	—	16.53	0.39
Edelweiss Mid Cap Fund	5,115	30.96	18.59	31.96	21.44	19.26	15.70	0.37
Mirae Asset Midcap Fund	14,252	28.10	16.79	31.26	—	—	15.41	0.35
PGIM India Midcap Opp Fund	9,924	17.11	12.33	31.14	23.73	19.10	15.22	0.30
Union Midcap Fund	1,065	26.77	16.13	30.43	—	—	15.65	0.33
Nifty Midcap 150 – TRI		34.43	19.39	31.81	19.79	18.34	16.64	0.35

The securities quoted are for illustration only and are not recommendatory.
Returns are on a rolling basis and in %. Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised. Risk ratios are calculated over a 3-year period assuming a risk-free rate of 6% p.a.
Data as of April 15, 2024
(Source: ACE MF, data collated by PersonalFN)
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 before investing. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

HDFC Mid-Cap Opportunities Fund boasts an impressive track record of consistently achieving above-average performance, clearly surpassing both its benchmark and many of its peers across various time periods in the past. After enduring a challenging phase between 2016 and early 2020, during which it struggled to surpass the benchmark, HDFC Mid-Cap Opportunities Fund has demonstrated a strong resurgence, generating significant gains in the past few years.

In the last 1-year and 2-year periods, HDFC Mid-Cap Opportunities Fund has generated a lead of around 4.5 percentage points over the benchmark and 7-10 percentage points over the category average. The recent superior growth has improved its long-term performance numbers as well. Over the longer 5-year and 7-year periods, the fund has generated returns nearly on par with the benchmark and has outpaced many of its peers.

The fund has also been reasonable when it comes to managing volatility. Its standard deviation (14.88%, annualised) is lower than that of its benchmark (16.64%, annualised) and is in line with the category average. In terms of risk-adjusted returns (as denoted by the Sharpe ratio), HDFC Mid-Cap Opportunities Fund has distinctly outperformed its benchmark and most of its peers by a significant margin.

[Read: AMFI Issues New Risk Disclosure Guidelines for Mid Cap and Small Cap Funds]

What is the investment strategy of HDFC Mid-Cap Opportunities Fund?

Categorised under midcap funds, HDFC Mid-Cap Opportunities Fund is mandated to invest at least 65% of its assets in equity & equity-related instruments of mid-sized companies, defined as those ranking 101st to 250th stock on full market capitalisation basis. The non-midcap exposure in the portfolio can go up to 35% of its assets.

Accordingly, HDFC Mid-Cap Opportunities Fund invests predominantly in stocks of mid-sized companies which have reasonable growth prospects, sound financial strength, sustainable business models, and are available at acceptable valuations that offer potential for capital appreciation. It follows the bottom-up approach to identify high-quality businesses for the long term, meaning the fund focuses on the strengths of company fundamentals rather than macroeconomic indicators.

HDFC Mid-Cap Opportunities Fund holds a well-diversified equity portfolio of around 60-70 stocks and prefers to stay invested in each of its holdings with a long-term view. Following a buy-and-hold investment strategy, the fund manager avoids unnecessary portfolio changes and refrains from chasing momentum. Moreover, the fund is cautious in its approach, which helps it to perform well even during uncertain market phases. HDFC Mid-Cap Opportunities Fund usually remains fully invested across market cycles, taking minimal cash calls.

What are the top portfolio holdings in HDFC Mid-Cap Opportunities Fund?

Holding in (%) as of March 31, 2024
(Source: ACE MF, data collated by PersonalFN) 

Being a large-sized Mid Cap Fund, HDFC Mid-Cap Opportunities Fund usually holds a large portfolio of 60-70 stocks and has limited the exposure to single stock to well within the 5% mark. As of March 31, 2024, HDFC Mid-Cap Opportunities Fund held 68 stocks in its portfolio, with the top 10 stocks accounting for 31.2% of its assets.

Mid-cap names like The Indian Hotels Company, Tata Communications, Apollo Tyres, Max Financial Services, and Max Healthcare Institute, currently figure among its top portfolio holdings. HDFC Mid-Cap Opportunities Fund has a low turnover ratio of around 10-20%, which reflects the strong long-term conviction the fund manager has when he picks the stocks for the portfolio and holds them for the long term.

HDFC Mid-Cap Opportunities Fund’s prominent bets on Hindustan Aeronautics, Bharat Electronics, The Indian Hotels Company, Max Healthcare Institute, Cholamandalam Investment & Finance Company, and REC have turned out to be highly rewarding for the fund in the last 2 years. The fund has also benefitted from its holdings in Apollo Tyres, Power Finance Corporation, Solar Industries India, Indian Bank, AIA Engineering, Persistent Systems, Supreme Industries, Oracle Financial Services, among others.

HDFC Mid-Cap Opportunities Fund’s portfolio is dominated by Banking & Finance and Engineering stocks that cumulatively form about 35% of its assets. The fund also held substantial exposure to Infotech, Auto Ancillaries, Pharma, Hotels, and Healthcare having allocation in the range of 4-9%. The top 5 sectors in the fund’s portfolio together accounted for around 51.3% of its assets. HMOF’s portfolio is fairly diversified across Cyclicals, Defensives, and Sensitive sectors.

Is HDFC Mid-Cap Opportunities Fund suitable for my investment goals and risk tolerance?

With an emphasis on identifying long-term growth prospects in fundamentally sound mid-sized stocks, HDFC Mid-Cap Opportunities Fund usually maintains a well-diversified portfolio of high-conviction stocks available at reasonable valuations. This strategy allows the fund a prolonged period to harness the growth potential of its investments. Moreover, it steers clear of chasing market trends which helps it reduce the risk while rewarding its investors adequately in the long run.

HDFC Mid-Cap Opportunities Fund enjoys the expertise of a steadfast fund management team, with Mr Chirag Setalvad at the helm for more than a decade now. Under his management, the scheme has generated a respectable alpha over the benchmark. His adherence to picking good quality and high-growth-oriented mid-sized companies available at acceptable valuations may help the fund sail through high market volatility without compromising on growth.

Given its substantial allocation to mid caps and small caps, HDFC Mid-Cap Opportunities Fund is suitable only for investors with a high risk appetite and willing to stay invested for a long-term period of at least 5-7 years.

Watch this video to find out the 5 best Mid Cap Mutual Funds for 2024:

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. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

This article first appeared on PersonalFN here