Though HDFC Mid-Cap Opportunities Fund has a corpus just short of Rs 20,000 crore, the fund house is not new to managing schemes with a large corpus.

Being a mid-cap focused fund, there is always a liquidity risk when dealing with an extremely large corpus. Hence, the fund needs to take adequate precautions in terms of diversifying the portfolio as per the asset allocation and over a range of stocks. A large corpus does reduce the flexibility of the fund, and could lead to suboptimal returns over the short-term.

HDFC Mid-Cap Opportunities Fund is the largest midcap-oriented scheme with an AUM of nearly Rs 20,000 crore, double of the next highest scheme on the list. The next highest being L&T Value Fund with an AUM of Rs 7,300 crore, followed by Reliance Growth with a corpus of Rs 6,600 crore. Many other mid-cap schemes with a smaller corpus have restricted inflows due lack of investment opportunities and liquidity constraints.

HDFC Mid-Cap Opportunities Fund earlier had a mandate to invest in a mix of mid-caps and small-cap stocks. However, as HDFC Mutual Fund now plans to classify the scheme as a Mid-cap, the investment objective of the fund will change to focus over 65% of the portfolio solely on mid-caps, as defined by the regulator. As per SEBI's circular, Mid-caps stocks are defined as those companies that lie within the 101st to 250th company in terms of full market capitalization.

This list of stocks, which is to be updated every six months of the calendar year, will be maintained by AMFI. If the fund's portfolio deviates from the list of stocks, it needs to be rebalanced within one month.

In terms of long-term performance, HDFC Opportunities Fund has not disappointed. The fund has generated strong returns in the market rallies of the past and has been able to restrict losses in a bear market. However, in the recent market rally, its performance was subdued, probably due risk mitigation strategies.

In this brief analysis, we take a close look at the features and performance of HDFC Mid-Cap Opportunities Fund.

Investment Objective of HDFC Mid-Cap Opportunities Fund

HDFC Mid-Cap Opportunities Fund has an investment objective to "provide long-term capital appreciation/income by investing predominantly in Mid-Cap companies"

HDFC MidCap Opportunities Fund Details

Fund Facts

Category	Diversified	Style	Blend
Type	Open ended	Market Cap Bias	Mid-cap
Launch Date	5-Jul-07	SI Return (CAGR)	17.80%
Corpus (Cr)	Rs 19,339	Min./Add. Inv.	Rs 5,000 / Rs 1,000
Expense Ratio (Dir/Reg)	1.08% / 2.13%	Exit Load	1%

Portfolio Data as on March 31, 2018.
SI Return as on April 18, 2018.
(Source: ACE MF)

Under normal circumstances, HDFC Mid-Cap Opportunities Fund will allocate…

• 65% - 100% to equity and equity related securities of Mid Cap companies

• 0%-35% to equity and equity related securities other than above

• 0%-35% to debt Securities (including securitised debt) and money market instruments

• 0%-10% to Units issued by REITs and InvITs

• 0%-10% to Non-convertible preference shares

Growth Of Rs 10,000, If Invested In HDFC Mid-Cap Opportunities Fund 5 Years Ago

HDFC MidCap Opportunities Fund: Year-on-Year Performance

HDFC MidCap Opportunities Fund: Performance Vis-à-vis Category Peers

Rolling Period Returns

Scheme Name	Corpus (Rs Cr)	1 Year	2 Year	3 Year	5 Year	Std Dev	Sharpe
Mirae Asset Emerging Bluechip	5,006	33.12	26.89	25.35	31.22	15.49	0.19
L&T Midcap Fund	2,403	37.80	26.68	24.03	28.92	15.69	0.19
Principal Emerging Bluechip Fund	1,657	31.98	24.65	21.98	28.00	16.54	0.15
IDFC Sterling Equity Fund	2,640	39.06	23.93	18.52	21.64	16.40	0.13
Canara Rob Emerg Equities Fund	3,212	33.27	23.52	22.99	29.47	17.44	0.15
DSPBR Midcap Fund	5,259	26.71	23.14	20.56	24.81	16.73	0.14
Kotak Emerging Equity Scheme	3,005	26.16	22.52	22.08	25.94	14.99	0.15
HDFC Mid-Cap Opportunities Fund	19,339	27.05	22.32	20.00	26.29	14.50	0.16
Sundaram Select Midcap	6,002	26.23	21.97	21.09	26.26	15.95	0.14
Kotak Midcap Scheme	819	25.81	21.75	20.39	23.62	15.43	0.14
Sundaram S.M.I.L.E Fund	1,278	32.02	21.65	20.76	26.99	20.75	0.09
Aditya Birla SL Midcap Fund	2,229	26.95	20.68	19.93	23.58	15.80	0.11
Franklin India Prima Fund	6,354	23.66	20.01	19.20	26.42	13.77	0.12
Edelweiss Mid Cap Fund	669	30.31	19.81	19.83	27.13	15.89	0.13
ICICI Pru Midcap Fund	1,450	27.89	18.89	16.91	25.15	15.69	0.10
BNP Paribas Mid Cap Fund	774	26.56	18.52	18.94	25.54	16.73	0.08
Invesco India Mid Cap Fund	171	24.62	17.23	16.52	24.18	15.13	0.07
SBI Emerging Businesses Fund	2,416	22.83	17.18	15.31	18.63	12.94	0.12
Tata Mid Cap Growth Fund	652	26.70	16.78	17.69	24.94	16.71	0.06
UTI Mid Cap Fund(D)	3,982	22.27	16.75	17.36	26.87	15.68	0.09
SBI Magnum MidCap Fund	3,799	17.20	16.36	18.93	27.22	14.08	0.10
IDFC Premier Equity Fund	5,372	20.69	13.41	13.93	20.51	14.12	0.01
Axis Midcap Fund	1,307	23.01	12.84	12.96	21.78	14.86	0.06
Nifty Free Float Midcap 100 - TRI		29.31	22.85	19.32	21.53	16.81	0.14

Returns are on a rolling basis and those depicted over 1-Yr are compounded annualised.
Data as on April 18, 2018
(Source: ACE MF)  

*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

On taking a look at the rolling period performance, the returns of HDFC Mid-Cap Opportunities Fund in the 1-year and 2-year rolling periods may look disappointing. The fund has lagged the benchmark in both these periods, albeit by a few percentage points. However, over the longer timeframes of 3-years and 5-years, the fund has outscored the benchmark by a decent margin.

In terms of risk mitigation, is where HDFC Mid-Cap Opportunities Fund scores over other peers. The volatility measured by standard deviation is much lower than the benchmark and similar mid-cap schemes. With the low risk and decent returns, HDFC Mid-Cap Opportunities Fund does well in the form of efficient risk-adjusted returns.

The top five mid-cap funds based on the 3-year rolling period performance include—Mirae Asset Emerging Bluechip, L&T Midcap Fund, Principal Emerging Bluechip Fund, IDFC Sterling Equity Fund, and Canara Robeco Emerging Equities Fund.

Investment Strategy of HDFC Mid-Cap Opportunities Fund

HDFC Mid-Cap Opportunities Fund follows bottom up approach of stock picking wherein the stocks are bought primarily for the strengths of company fundamentals rather than the strength of the macro-economic indicators. It holds a well-diversified equity portfolio and prefers to stay invested in each of its holdings with a long-term view.

The aim of equity strategy will be to predominantly build a portfolio of mid-cap companies that have:

a) reasonable growth prospects,

b) sound financial strength,

c) sustainable business models, and

d) acceptable valuation that offer potential for capital appreciation

HDFC Mid-Cap Opportunities Fund aims to maintain a reasonably diversified portfolio at all times.
It may also invest a certain portion of its corpus in debt and money market securities. Investment in debt securities will be guided by credit quality, liquidity, interest rates and their outlook.

The midcap scheme may also invest in the hybrid securities viz. units of REITs and InvITs for diversification and subject to necessary stipulations by SEBI from time to time.

HDFC MidCap Opportunities Fund - Portfolio Allocation and Market Capitalisation Trends

HDFC MidCap Opportunities Fund – Top Portfolio Holdings

Top 10 Stocks   Stocks % of Assets Sundram Fasteners Ltd. 4.11 Cholamandalam Investment & Fin. 4.05 Balkrishna Industries Ltd. 3.61 Voltas Ltd. 3.42 Hexaware Technologies Ltd. 2.78 City Union Bank Ltd. 2.61 TI Financial Holdings Ltd. 2.49 Aarti Industries Ltd. 2.47 RBL Bank Ltd. 2.24 Exide Industries Ltd. 2.10	Top 5 Sectors
Holdings (in %) as on March 31, 2018 (Source: ACEMF)

HDFC Mid-Cap Opportunities Fund maintains a reasonable diversified portfolio of stocks. The allocation is not skewed to a specific set of stocks or sectors. None of the holdings have an exposure of over 5% in the portfolio. Out of the 65 stocks in the portfolio, the top 10 holdings command an allocation of 30%. Auto component manufactures such as Sundaram Fasteners, Balkrishna Industries and Exide Industries are among the top holdings.

Among the sectors, Auto Ancillaries stocks gains an allocation of 14%. Financial stocks, including banks, account for nearly 25% of the portfolio, with a weightage of around 12% each. About 10% of the portfolio is allocation to Consumer Durables, while 7% of the assets is formed by Industrial stocks.

Top Gainers in HDFC MidCap Opportunities Fund's portfolio

Most of the stocks in the portfolio have be held for a period of over 1 year. The top gainers in the fund's portfolio include, Hexaware Technologies, Balkrishna Industries and Voltas. These stocks returned 75%, 55% and 51% over the past year. Among the other gainers in the portfolio were Cholamandalam Investment & Finance Company, Aarti Industries and Apollo Tyres.

At the same time, there were a few laggards in the portfolio as well. TI Financial Holdings generated a return of merely 4%, while Exide Industries declined by 1%. The Federal Bank, Torrent Pharmaceuticals, Jagran Prakashan, AIA Engineering and Max Financial Services were the other stocks than declined in value. A mid-cap focussed fund is bound to have laggards. The skill lies in how the fund management deals with such stocks.

Suitability of HDFC Mid-Cap Opportunities Fund

PersonalFN is of the view that, though the mid and smallcap space has corrected, the valuations are not encouraging, unless you hold a very high-risk appetite. If Indian equities tumble due to any global and/or domestic factors, the mid and smallcap space are bound to take a beating, in fact by a greater magnitude than large caps, especially in an environment where corporate earnings miss market expectations.

Midcap stocks tend to have a higher growth potential. They are often less researched and hence, more often, available at a discount to large-caps. Investment in midcaps can be rewarding over a longer term, as they need considerable time to grow. Though midcaps are often referred as the future large-caps, very few companies actually manage to zoom past the competitors. These companies are not as stable as the large sized companies and at times struggle to sustain when the going gets tough. For this reason, investment in midcaps is considered highly risky. But investment in mid-caps could be well-rewarding over the long-term, provided you hold a very high risk appetite.

Hence, it's better to be very selective in your approach. Prefer mutual fund schemes that follow strong investment processes and systems. Also, if you don't mind the short-term volatility, staggering your investments would be a better strategy, as it can help manage downside risk. If you are addressing long-term financial goals, opt for Systematic Investment Plans (SIPs), as it would help you mitigate the risk.

HDFC Mid-Cap Opportunities Fund, being mid-cap focused is certainly suitable for investors having a high-risk appetite with a long-term investment horizon. However, given the high AUM of the fund, a high investment in mid-cap could pose a liquidity risk. Many similar mid-cap funds, with a smaller corpus, have chosen to restrict inflows due to this liquidity issue. HDFC Mid-Cap Opportunities Fund has not yet issued any such instructions as it seems comfortable with the portfolios current liquidity.

As far as the AUM of mutual fund houses is concerned, PersonalFN is of the view that the size of mutual fund schemes doesn't tell you anything about its future performance. The key to a fund's performance lies in its investment style, which is also a factor of the fund manager's experience and investment processes followed by the fund house.

It is best to assess whether the AUM growth is causing changes to the investment style. Some changes may be in the interest of the investors and some may not. Act before any changes materialise as a disappointing performance.

Many investors pick schemes solely based on past performance, which may be unachievable with the change in investment style. So, you need to take a deeper look scientifically to pick the best mutual fund schemes for the portfolio. If a fund has changed its investment mandate, you may tone down on your return expectations or just move out.

If you plan to invest in mid-cap funds, do ensure that the investments is in line with your financial goals. If you are not sure about how to align these schemes with your tax planning or financial goals, do consult your financial planner or investment advisor.

Note: This write up is for information purpose and not a recommendation to buy or sell the mutual fund scheme. 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.

Editor's note: If you’re unsure where to invest fresh investible surplus currently, to strike the correct risk-return trade-off we recommend adopt a ‘core and satellite approach’ to investing. Here are 6 benefits of ‘core and satellite approach’: Facilitates optimal diversification; Reduces the risk to your portfolio; Enables you to benefit from a variety of investment strategies; Aims to create wealth cushioning the downside; Offers the potential to outperform the market; and Reduces the need for constant churning of your entire portfolio  ‘Core and satellite’ investing is a time-tested strategic way to structure and/or restructure your investment portfolio. Your ‘core portfolio’ should consist of large-cap, multi-cap, and value style funds, while the ‘satellite portfolio’ should include funds from the mid-and-small cap category and opportunities style funds. But what matters the most is the art of astutely structuring the portfolio by assigning weightages to each category of mutual funds and the schemes you select for the portfolio.  Moreover, with change in market outlook the allocation/weightage to each of the schemes, especially in the satellite portfolio, need to change. Keep in mind: Constructing a portfolio with a stable core of long-term investments and a periphery of more specialist or shorter-term holdings can help to deliver the benefits of asset allocation and offer the potential to outperform the market. The satellite portfolio provides the opportunity to support the core by taking active calls determined by extensive research. So, PersonalFN offers you a great opportunity, if you’re looking for “high investment gains at relatively moderate risk”. Based on the ‘core and satellite’ approach to investing, here’s PersonalFN’s latest exclusive report: The Strategic Funds Portfolio For 2025 (2018 Edition). In this report, PersonalFN will provide you with a readymade portfolio of its top equity mutual funds schemes for 2025 that have the ability to generate lucrative returns in the long run. PersonalFN’s “The Strategic Funds Portfolio for 2025” is geared to potentially multiply your wealth in the years to come. Subscribe now!

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About the Company including business activity 

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989. 

QIS was promoted by Mr. Ajit Dayal with an objective of providing value-based information / views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

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2. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report.
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