Mutual Funds

L&T Midcap: A low-risk way to portfolio construction

K Venkatasubramanian | Updated on July 25, 2018 Published on July 21, 2018

The fund’s exposure to individual stocks is highly restricted

Very few mid-cap funds manage to provide substantial outperformance over the markets and yet contain downsides across cycles. L&T Midcap is a scheme that delivers on both these counts by taking a low-risk approach to portfolio construction. Over one-, three- and five-year time-frames, the fund has outperformed its benchmark — Nifty Midcap 100 Index TRI. The level of outperformance has been to the extent of 4-7 percentage points over 3-10-year periods.

L&T Midcap has consistently been among the top few funds in its category in terms of returns over the years. In the past 10 years, the scheme has delivered a robust 19.2 per cent annually. Over the long term, the fund has done much better than peers such as Aditya Birla SL Mid Cap, Kotak Emerging Equity and DSPBR Mid Cap.

Investors with a moderate risk appetite can consider the fund for the core of their equity portfolios. Exposure to the scheme can also be considered through the systematic investment plan (SIP) route, with at least a 5-7 year horizon.



Diffused holdings

One of the features of L&T Midcap is how its exposure to individual stocks is highly restricted. The scheme holds more than 65 stocks across market cycles, making for a fairly diffused portfolio. Even the top 10 stocks each account for only 3-4 per cent of the portfolio. The fund also has the propensity to invest 6-10 per cent of its portfolio in debt and cash irrespective of the underlying market conditions.

Thus, despite being a mid-cap fund, the scheme’s portfolio carries modest levels of risks. The diffused portfolio also ensures that the fund contains downsides during volatile markets; L&T Midcap has also ensured participation during rallies.

Portfolio moves

Two sectors have always found favour with the fund — consumer non-durables and financial services — and have featured among its top holdings. Exposure to the financial services space is through quality names such as RBL Bank, AU Small Finance Bank, City Union Bank and Sundaram Finance. In the consumer durables space, names such as Emami and Berger Paints figure prominently.

In the past couple of years, the fund has reduced its exposure to construction stocks, which have had a rough run in recent times.

As cement stocks were beaten down over the past one year, L&T Midcap has upped its stakes in the segment. The scheme has also increased exposure to pharma stocks over the last one year, given the heavy correction that the stocks in the industry has witnessed. These moves suggest that the scheme bets on a blend of value and growth.

The fund takes bets in the auto segment through bets in the ancillary space, which are a tad more defensive. Given L&T Midcap’s consistent track record over the past decade, it would be a suitable addition for investors looking for superior returns with medium levels of risks. Mid-cap schemes tend to have periods of underperformance, but in the case of L&T Midcap, these have been, if at all, minimal. Investors can take the SIP route to average costs and ride out volatilities over the long term.

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