Ideal Asset Allocation through the Midcap route
The path to create wealth over the long term in the world of mutual funds is through the equity-oriented funds route - is a fact we all accept and acknowledge, but in these volatile times, asset allocation have assumed a bigger role than ever. Investment advisors and expert financial planners are busy chalking the right asset allocation model based on the investor’s age and his risk appetite to suit his overall financial planning and help him in realizing his investment objectives.
Mutual funds as a preferred investment vehicle for financial planning have gained ground pretty fast. The paradigm shift in Indian psyche from viewing mutual funds as pure returns instruments to products which can blend with their individual investment style is amazing, and is a tribute to the superior product innovation and tireless efforts of the industry as a whole.
Coming back to the subject of asset allocation, a major question which an investor faces after he has zeroed in on the amount of equity exposure, is the allocation between Large, Mid and Small cap funds.
There are a total of 168 equity-oriented schemes in the country now and approximately twenty schemes which are either dedicated to investing in midcap or large cap stocks or have a flexi/multi cap mandate. The chief reason behind the AMCs launching so many market cap-based schemes is the realization of the fact that these schemes are now looked upon as a separate category, and as the world of investing in India gets more sophisticated, these schemes will realize even more attention.
If we look at the performance of the entire equity-oriented schemes in the last one year period a midcap scheme – Sundaram Select Midcap is dominating the rankings, in an era when the general perception is that large caps have outperformed the midcap in the recent times. For example, Sensex returns for the last one year period is 46.2% and in the same time, BSE Midcap has appreciated by only 19.07%. Even in the long run, Reliance Growth which is a midcap oriented scheme is dominating the ranking in the five-year return category.
Large cap stocks typically signify stability of returns and less volatility as there is a clear earnings visibility, strong business model and long term performance record. For investors in these bluechip stocks there are plenty of advantages like liquidity and ready availability of company’s financial and other related information which makes it a little easier to track the company, these stocks generally have a large number of analysts tracking them; therefore any downward deviation comes with a lot of advance warnings, giving investors the requisite time to liquidate their holdings. Comparatively, Midcaps are less liquid and more volatile but they are still favoured by the investors, because they compensate the above handicaps by offering higher returns.
In Emerging markets and specifically in countries like India, where the markets are just coming of age, there are plenty of opportunities in the Midcap space, which is due to the fact that a booming economy gives birth to and sustains new ideas and businesses all around, and companies with the right mix of business model and people have the potential to become, as they say, large cap of tomorrow.
India is home to some of the finest technology, has become an outsourcing hub on the back of skilled and cheap labour, its management quality is fast being recognized as world class, and globalization which was initially looked upon as a threat has now been converted into an opportunity, the above factors combined with the favourable demographics of Indian population, political stability has lead to an environment which is very conducive for trade and business to flourish.
Presently, Midcaps find a place in the overall portfolio of the investors “just to spice up the returns” and even for the most aggressive of the fund investors, it may mean a 10-15% higher allocation than normal. Not surprisingly, the combined fund size of the capitalisation-oriented funds is only around 20% of the total corpus managed by equity diversified schemes.
In view of the above arguments, investors – even the most conservative of the lot, who have decided to allocate a certain portion of his hard earned money into equities, must not kill his portfolio by allocating a larger share of the pie to large cap stocks than is necessarily required and must get invested in the Indian midcap space, where the growth rate is not just phenomenal but looks sustainable as well.
The path to create wealth over the long term in the world of mutual funds is through the equity-oriented funds route - is a fact we all accept and acknowledge, but in these volatile times, asset allocation have assumed a bigger role than ever. Investment advisors and expert financial planners are busy chalking the right asset allocation model based on the investor’s age and his risk appetite to suit his overall financial planning and help him in realizing his investment objectives.
Mutual funds as a preferred investment vehicle for financial planning have gained ground pretty fast. The paradigm shift in Indian psyche from viewing mutual funds as pure returns instruments to products which can blend with their individual investment style is amazing, and is a tribute to the superior product innovation and tireless efforts of the industry as a whole.
Coming back to the subject of asset allocation, a major question which an investor faces after he has zeroed in on the amount of equity exposure, is the allocation between Large, Mid and Small cap funds.
There are a total of 168 equity-oriented schemes in the country now and approximately twenty schemes which are either dedicated to investing in midcap or large cap stocks or have a flexi/multi cap mandate. The chief reason behind the AMCs launching so many market cap-based schemes is the realization of the fact that these schemes are now looked upon as a separate category, and as the world of investing in India gets more sophisticated, these schemes will realize even more attention.
If we look at the performance of the entire equity-oriented schemes in the last one year period a midcap scheme – Sundaram Select Midcap is dominating the rankings, in an era when the general perception is that large caps have outperformed the midcap in the recent times. For example, Sensex returns for the last one year period is 46.2% and in the same time, BSE Midcap has appreciated by only 19.07%. Even in the long run, Reliance Growth which is a midcap oriented scheme is dominating the ranking in the five-year return category.
Large cap stocks typically signify stability of returns and less volatility as there is a clear earnings visibility, strong business model and long term performance record. For investors in these bluechip stocks there are plenty of advantages like liquidity and ready availability of company’s financial and other related information which makes it a little easier to track the company, these stocks generally have a large number of analysts tracking them; therefore any downward deviation comes with a lot of advance warnings, giving investors the requisite time to liquidate their holdings. Comparatively, Midcaps are less liquid and more volatile but they are still favoured by the investors, because they compensate the above handicaps by offering higher returns.
In Emerging markets and specifically in countries like India, where the markets are just coming of age, there are plenty of opportunities in the Midcap space, which is due to the fact that a booming economy gives birth to and sustains new ideas and businesses all around, and companies with the right mix of business model and people have the potential to become, as they say, large cap of tomorrow.
India is home to some of the finest technology, has become an outsourcing hub on the back of skilled and cheap labour, its management quality is fast being recognized as world class, and globalization which was initially looked upon as a threat has now been converted into an opportunity, the above factors combined with the favourable demographics of Indian population, political stability has lead to an environment which is very conducive for trade and business to flourish.
Presently, Midcaps find a place in the overall portfolio of the investors “just to spice up the returns” and even for the most aggressive of the fund investors, it may mean a 10-15% higher allocation than normal. Not surprisingly, the combined fund size of the capitalisation-oriented funds is only around 20% of the total corpus managed by equity diversified schemes.
In view of the above arguments, investors – even the most conservative of the lot, who have decided to allocate a certain portion of his hard earned money into equities, must not kill his portfolio by allocating a larger share of the pie to large cap stocks than is necessarily required and must get invested in the Indian midcap space, where the growth rate is not just phenomenal but looks sustainable as well.
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