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With valuations of mid-cap stocks correcting, long-term investors can consider taking exposure to mid-cap funds. L&T Midcap boasts a solid track record in this category.
The fund has delivered good returns across market cycles and has outperformed its benchmark — the Nifty Midcap 100 TRI — over longer periods of three and five years.
A well-diversified portfolio, deft asset allocation and right sector choices define the fund’s characteristics. Considering that mid-cap stocks are subject to sharper price swings than large-cap ones, only those with a high risk appetite need to invest in it. Investors can consider the SIP route to take advantage of volatility in the market.
As per SEBI norms, mid-cap funds are mandated to hold at least 65 per cent of their portfolio in mid-cap stocks. While L&T Midcap does this, the fund increases its large-cap holdings up to 15 per cent when markets are volatile in order to lend stability to the returns or limit losses.
Debt holdings
Besides, the scheme reduces the risk of underperformance in iffy and falling markets by adding to its cash/debt holdings. For instance, in the volatile markets of 2015 and 2016, it predominantly held only 90-95 per cent in equities; ditto during the 2018 fall, where it held only 85-93 per cent in equities. This has helped the fund score better than its benchmark in these periods.
In the 2018 fall, when mid-cap stocks took a hard knock, the fund lost only about 11.7 per cent, compared with the benchmark’s 14.5 per cent fall. Even in rallies, the fund is not fully invested in equities, 2017 being a good example. However, it managed to outshine the benchmark due to the right bets on stocks and sectors.
Holding 60-70 stocks at a time, the fund’s portfolio is quite diffused. Unlike many other funds, L&T Midcap’s exposure to its top holdings remains only 3-4 per cent, reducing concentration risk.
Current portfolio
In its latest portfolio, the scheme holds about 13 per cent in large-cap stocks and 8-9 per cent in cash. With the worst of the NPA crisis behind it, banking stocks are back in the limelight. The fund has been increasing holdings in this space over the past few months. It is also betting on a revival in real estate/construction through higher exposure to cement stocks.
On the other hand, slowing demand for consumer goods has seen the fund cut down on consumer non-durable and auto ancillary exposures. Over the past year, it has benefited from the rise in stock prices of holdings such as Shree Cement, Divi’s Labs, Apollo Hospitals and RBL Bank. Recent additions to the portfolio include Mahanagar Gas, Syngene International and Canara Bank.
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