All about the HSBC midcap fund

HSBC Midcap Equity Fund is the latest fund to hit the 'mid cap diversified equity fund' space. Mid cap equity funds have a higher risk profile vis-à-vis large cap equity funds. Large cap companies are well-established; boast of a track record and liquidity in the stock in most cases can be termed as 'comfortable'.

Since mid caps fall short on most of these criteria, the risk of investing in them is several notches higher. We believe in at least two aspects, HMEF has an investment proposition that should make investors sit up and take notice.

The first one - superior diversification in terms of stock allocations is an important trait of HSBC Mutual Fund's equity funds and HMEF will assume this trait as well. To that end, HMEF's well-diversified fund management style will help in mitigating risks from volatility in mid cap stocks.

However, this is by no means a trait peculiar to HMEF. Some existing mid cap funds like Franklin India Prima Fund, Sundaram Select Midcap Fund and HDFC Capital Builder also have very well-diversified portfolios (in terms of stocks).

The second one - imposition of a cap on the net assets to reduce the risk levels associated with a mid cap fund. HSBC Mutual Fund appreciates that there may not be sufficient investment opportunities and liquidity in the mid cap space and have capped the net assets at Rs 700 crores (Rs 7 billion). This is a first for a mutual fund in India, although this is not uncommon in developed mutual fund markets like the USA for instance. However, in time should the fund manager believe that investment opportunities in the mid cap space have increased, he has the option to increase the ceiling from the Rs 700 crore mark.

HSBC Mutual Fund's well-defined investment processes, team-based approach to investing, well-diversified portfolio strategy and consistent performance of the flagship equity fund - HSBC Equity Fund (albeit across a shorter tenure of less than 3 years), are strong positives that should make HMEF an investment option in the mid cap equity fund space.

HMEF will pursue a top-down

The fund will be well-diversified, again in line with the style that other equity funds from HSBC Mutual Fund have adopted. To get an idea of this - as on March 31, 2005 HSBC Equity Fund and HSBC India Opportunities had 56 stocks and 63 stocks in their respective portfolios.

The fund has indicated it will invest at least 65 per cent of net assets in stocks from the CNX Midcap 200 Index, which is its benchmark index or in stocks that fall within the market capitalisation requirement of CNX Midcap 200 Index at the point of investment. It can invest upto 35 per cent in stocks outside the CNX Midcap 200 but with a market capitalisation lower than that of the largest constituent of the CNX Midcap 200 Index. It can invest upto a maximum of 35 per cent in debt and money market instruments.

Mr. K. R. Shanbhag is the fund manager of HSBC Midcap Equity Fund. He was a Senior Analyst at HSBC Mutual Fund before graduating as the fund manager. He has been associated with the fund house since inception in 2002. Before joining HSBC Mutual Fund he was with ING Mutual Fund.

Investors should expect above average volatility in HMEF's performance vis-à-vis a large cap diversified equity fund. This is because mid caps tend to be more volatile than large caps for reasons outlined above. However, two factors will work in HMEF's favour and make turbulence a little less worrisome.

One is HMEF's superior diversification in terms of number of stocks in the portfolio. The other is the cap on net assets at Rs 700 crore which will reduce the pressure on the fund manager during a downturn in the mid cap segment when liquidity could pose a problem with other, larger-sized mid cap funds.

The flexibility to invest upto 35 per cent in debt/money market instruments will also enhance the investment options at the fund manager's disposal and help in curbing volatility