When open-ended equity funds had almost been consigned to mutual fund folklore, we at last have an AMC (Asset Management Company) that finds it worthwhile to launch an open-ended equity fund. Even more surprising is the nature of the offering - a small and mid cap equity fund, and the AMC launching it - DSP Merrill Lynch Mutual Fund, an AMC that had patiently stood on the sidelines to watch its peers launch a slew of mostly forgettable NFOs (New Fund Offers).
We have never been big believers of timing the market, so we do not have much to say about the timing of the launch. If anything, it is probably a good time to launch a high risk offering like a mid cap fund at this stage, now that investors have got a fairly good idea of the wild oscillations that mid cap stocks can be subjected to.
To be sure, mid caps hold above-average potential for risk-taking investors. These stocks, if identified correctly at an early enough phase in their history, can reap significant gains for investors over the long-term. The much-touted names - Infosys, Wipro, Hero Honda, HDFC Bank, among others, were small/mid caps at one point in time. Today they have grown into some of the most respected names in their sectors. So for high-risk investors, it pays to invest in mid cap stocks/funds with the intention (and hope) of identifying an opportunity earlier on and riding it long enough to clock above-average gains
Now for the risk - for every Infosys, Wipro, HDFC Bank that gets talked about by mid cap fund managers, there are several companies with names that you haven't even heard of, or probably forgotten, like Aftek Infosys, Vikas WSP, Silverline, Nath Seeds, Synergy Login, Global Trust Bank to name just a few. These companies simply failed to live up to their billing as future large caps; in other words, they did not have it what it takes to become a large cap thereby underlining the risk an investor takes with mid caps in terms of time and money invested in them.
Mid caps do not have established track records (in terms of sales and profit to name a couple of parameters) and their systems are usually in an evolutionary stage. Moreover data (which is the building block for research) on mid caps is not easily available, so it's easy to err while taking a call on a mid cap. While there is always a risk with stocks (including very well-established large caps), the risk with mid caps is decidedly higher.
More importantly, since mid caps have yet to establish a track record, investors have to be very patient while investing in them. It could be a while before well-identified mid caps unlock the potential that is expected of them. So flitting in and out of mid cap stocks/funds may not be the right way to go about investing in mid caps.
As far as DSP ML Small and Mid Cap Fund (DSP ML SMC) is concerned, we believe that risk-taking investors should consider investing in the fund. Over the years, DSP ML Mutual Fund has built a reputation of delivering the goods. We have observed this, over the years, across mutual fund categories, be it diversified equity - growth (DSP ML Opportunities), diversified equity - value (DSP ML Equity), balanced (DSP ML Balanced) or monthly income plans (DSP ML Savings Plus). We are inclined to believe that the fund house's fund management expertise will stand it in good stead while managing DSP ML SMC.
