Sundaram Select Midcap: A stable long-term performer - Hold

Those with exposure to Sundaram Select Midcap can hold their investments in the fund. Its long-term performance over the past three- and five-year periods has been healthy and the scheme is placed among the top quartile in the mid-cap segment. However, fresh exposure can be avoided for now, for a couple of reasons.

First, the fund has delivered lacklustre performance over the last one year, underperforming its benchmark S&P BSE mid-cap index as well as the mid-cap category average.

However, it has performed better than some of its peer funds — HDFC Mid-Cap Opportunities, UTI Mid-cap and IDFC Premier Equity.

Second, the rally in the riskier mid-cap stocks appears overdone; this space has been witnessing volatile movements since early November.

The downside could be sharp and painful.

That said, given Sundaram Select Midcap’s good long-term performance, investors can continue their existing systematic investment plan (SIP). However, fresh SIPs and lumpsum investing can be avoided at this juncture.

Performance and strategy

The fund has contained downsides well in the past. For instance, during the 2008, 2011 and 2013 market corrections, the fund limited its fall better than its benchmark. On the other hand, it made the most of market rallies which is evident from the excellent gains in 2009 and 2014. But the fund marginally trails its benchmark in the current rally.

Importantly, about one-third of the mid-cap funds have underperformed the S&P BSE Mid-cap index over the past one year period, which could be due to imbalance in the sector allocation compared to the benchmark’s sector allocation.

Sundaram Select Midcap is overweight on financials, engineering, FMCG and automobile sectors and underweight in sectors such as chemicals, energy, construction, healthcare and technology. Though the fund had benefited from the rallies in sectors such as financials, FMCG and automobile, this has not boosted its NAV much.

Sundaram Select Midcap has currently invested about 78 per cent in mid-caps — the exposure is slightly more than some of its peers. This may partly explain the current underperformance.

Interestingly, it does take active cash calls and has upped its cash position recently. The fund holds 67 stocks in its kitty and risk is mitigated as the allocation towards individual stocks is mostly less than 2.5 per cent, barring one or two.

The fund picks high-growth stocks that are reasonably valued and takes a bottom-up approach.

Its future bet on the looming domestic economic recovery and consumption-based sectors can help it keep pace with its peers in the long term.

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