L&T Midcap Fund: Exploring High Growth Potential Midcaps

Do note that the risk is substantially higher in mid caps as compared to large caps and one should invest in it only if they have the appetite to bear short term volatility.

L&T Midcap Fund (LTMF) is one of the popular schemes in the midcap funds category that has performed exceedingly well over longer time periods and rewarded investors with superior risk adjusted returns.

Data as on September 29, 2020
(Source: ACE MF)

LTMF has been a top quartile performer that has dominated the mid cap space across longer time periods in the past. The fund has outperformed its benchmark by a margin of about 3-4 percentage points over the last 1-year to 3-year time periods, though it has trailed the category average. On a 5 year and 7 year returns basis, it stands among the category toppers generating superior lead over the benchmark Nifty Midcap 100 - TRI and the category average.

What is more important, the fund has achieved this feat at a reasonable risk, thus delivering competitive risk adjusted returns as well.

Investment strategy of L&T Midcap Fund

LTMF holds no sector or style bias. The fund invests minimum 65% of its assets in stocks of midcap companies, while the remaining portion is predominantly invested in small caps.

While creating its investment portfolio, LTMF follows the bottom-up approach to stock picking. The fund house's proprietary GEM investment approach (i.e. Generate Idea, Evaluate Business and Manage Business) helps it determine the investment portfolio. The fund invests 70% of its portfolio in high quality mid cap stocks (i.e. companies with good moats, scalable business, available at a decent price) which is a core long term strategy, while 30% of the portfolio is in companies with a deep value (multi-baggers) to generate alpha. LTMF uses diversification as a tool to control the downside risk and usually holds a well-diversified portfolio spread across stocks and sectors.

As on August 31, 2020, LTMF held a well-diversified portfolio of as many as 64 stocks, with midcap names like Bayer CropScience, Emami, Ipca Laboratories, Mphasis, and Syngene International making to the list of its top holdings. The top 10 holdings accounted for about 29.4% of its total assets, with exposure to single stock being well within the 4% mark.

In the last one year stocks like Abbott India, ICICI Securities, Affle (India), Bayer CropScience, Coromandel International, Multi Commodity Exchange of India, Deepak Nitrite, etc. contributed the most to the fund's gains. However, stocks like City Union Bank, EIH, Oberoi Realty, The Federal Bank, The Indian Hotels Company, among others, eroded some of its gains.

LTMF held its top exposure in Finance and Pharmaceutical sector with allocation of 14.7% and 10.8%, respectively. Notably, it has significantly increased exposure in Financials that have the advantage of being the early beneficiaries of pick-up in overall economic activity. The fund also has significant weightage in Engineering, Chemicals, Consumption, Infotech, among others.

Suitability

LTMF is a process-driven fund and has been agile enough to take advantage of various investment opportunities present in the midcap segment. The fund usually maintains a diversified portfolio of quality mid cap stocks and aims to invest in high growth-oriented stocks, but is watchful of the price it pays to acquire such stocks. This strategy has enabled the fund reward investors handsomely over longer time periods in the past. With two experienced fund managers at the helm, its stock convictions have played out well over a period of 3 to 5 years, and has the potential to do so in future as well. This makes LTMF suitable for investors with high risk appetite and investment horizon of at least 5 years.

Warm Regards,
Divya Grover
Research Analyst

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Note:   This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

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