This mutual fund stands tall

For obvious reasons, investing in midcap funds has struck a chord with investors for quite some time now. It is widely acknowledged that midcap funds offer above-average growth potential. However, the point that gets missed is that this growth potential comes at a price, i.e. higher risk.

Sundaram BNP Paribas Select Midcap Fund is one fund that, over various market cycles, stands tall over its peers in the midcap funds segment.

What SSM offers

SSM, an offering from Sundaram BNP Paribas Mutual Fund was launched in July 2002, a few months before the rally in mid caps was triggered. After Franklin Prima Fund (which was launched way back in December 1993), SSM was the first mid cap fund to be launched in the market.

Mid cap stocks tend to be under-researched, thereby providing an investment opportunity that is yet to be identified by the stock market. For this reason mainly, investments in such companies (provided they are well-managed) offer higher growth potential and the opportunity for investors to clock above-average returns over the long-term (which in our view is at least 5 years for mid caps).

On the flipside, mid-sized companies being under-researched may lull investors into overlooking some reasons for "not investing". As risk control measures and corporate governance in many mid caps are lax, the chance of manipulation in such companies is higher. Similarly, there is a possibility that the stock is illiquid even after considerable time making it an unviable proposition for the fund manager.

For the purpose of peer comparison, we have considered funds that predominantly invest in the mid cap segment; furthermore, only those funds, which have been in existence for at least 5 years have been chosen. It should be noted that the benchmark index of SSM is BSE Midcap. However, since the same is not commonly available in public domain, we have taken a comparable index i.e. CNX Midcap for evaluation.

It is evident from the table that SSM has pitched in an impressive performance on the net asset value (NAV) appreciation front vis-à-vis peers. Over the 5-year time frame, it has clocked an impressive return of 66.4% CAGR. The fund has also successfully outperformed the CNX Midcap over the long-term.

Volatility

Standard Deviation (SD) is a measure of the volatility in a mutual fund's performance; a lower SD denotes lower risk. SSM emerges as the best performer on the volatility control front with a SD of 6.72% (the lowest in its peer group) implying that its investors have been exposed to lower risk vis-à-vis peers; Reliance Growth (7.18%) is the most volatile fund.

Risk-adjusted return

Sharpe Ratio (SR) evaluates how well the mutual fund has compensated investors for the risk borne. For this purpose its returns are compared with those of a risk-free instrument. The higher a fund's SR, the better is its performance on the risk-adjusted return front. SSM (Sharpe Ratio 0.48%) delivers a competent performance on the risk-adjusted returns front as well to emerge as the top performer.

The above graph bears testimony to SSM's good showing as compared to CNX Midcap. Rs 100 invested in SSM on inception (July 2002) would have grown to Rs 1,270.6 by November 22, 2007. Had the same amount been invested in the CNX Midcap, it would have appreciated to Rs 790.0.

Fund management

One of the more commendable traits of SSM include a process-driven, investment style that makes it relatively indifferent to the absence/presence of a star fund manager. That is mainly why even the exit of a competent fund manager like Anoop Bhaskar has not dented its performance. Some recent changes in the fund's investment style include a) a willingness to be fully invested most of the time and b) a leaner portfolio (i.e. fewer stocks).

What should investors do?

Now the big question is, should an investor consider investing in the fund? Well, that would depend on his risk appetite, investment objective and existing portfolio, among a host of other factors. At Personalfn, we have always maintained that a 'one size fits all' approach doesn't work while investing. An investment avenue that is apt for one investor could be grossly unsuitable for another. Therefore, investors would do well to consult their investment advisors/financial planners to determine the suitability of SSM in their portfolio.