Not necessarily! Ask those thousands of investors who lost their money in the tech fund trend in 1999 and the Morgan Stanley trend before that.

Actually, the trend (or the herd mentality) is something that has plagued the investment community for a long time now. Its not just the mutual fund investor, but even the stock investor who has been victim to the latest ongoing trend.

Midcap Funds: Flavour of the season

Small/Midcap Funds	NAV (Rs)	1-MTH	6-MTH	1-YR	3-YR	5-YR	INCEP.
RELIANCE VISION	24.5	1.4%	30.0%	82.9%	11.7%	13.8%	13.6%
PIONEER I PR FUND G	27.4	2.6%	4.2%	68.3%	6.9%	22.4%	12.2%
RELIANCE GR G	28.3	-0.2%	18.8%	55.5%	5.4%	16.8%	16.0%
PIONEER I PR PLUS G	22.5	1.3%	-7.6%	21.4%	6.2%	23.0%	12.1%
SUNDARAM SELECT MIDCAP	10.2	2.0%	-	-	-	-	2.8%

(NAVs as on Sept 6, 2002. Returns over 1-Yr are compounded annualised)

Right now, midcap funds (investing primarily in BSE100, BSE200 and S&PCNX 500 stocks) are the hottest trend in the domestic mutual fund industry. A popular fund house recently launched a midcap fund that got an overwhelming response with subscriptions exceeding Rs 1 bn (Rs 100 crores). Actually in a market like this one, this can be termed as more than overwhelming. This is in line with what some other fund houses have witnessed in their midcap offerings. This may even remind one of the overwhelming response towards tech funds in 1999-2000. And if you step back in history a little further, you are reminded of the Morgan Stanley IPO that clocked about Rs 10 bn (Rs 1,000 crores) and a lot of other mutual fund IPOs that were sold like stock IPOs. (To receive free daily NAVs of equity funds in your mailbox, please click here

Large Cap Funds: Out of favour?

Large Cap Funds	NAV (Rs)	1-MTH	6-MTH	1-YR	3-YR	5-YR	INCEP.
ZURICH I EQUITY G	21.5	-0.2%	-3.2%	32.7%	6.8%	24.1%	11.3%
ZURICH I TOP 200 G	16.2	1.8%	-0.6%	24.0%	NA	NA	0.6%
PIONEER I BLUECHIP G	21.9	1.7%	-6.8%	20.9%	9.3%	24.9%	21.7%
FRANKLIN GROWTH	5.3	1.7%	-7.0%	20.0%	NA	NA	-22.9%
TEMPLETON GROWTH G	12.5	NA	-6.9%	15.1%	6.1%	3.8%	5.8%
ALLIANCE EQUITY G	25.2	2.3%	-7.5%	13.2%	2.9%	NA	24.8%
BIRLA ADV FUND B	24.3	-0.9%	-7.0%	11.4%	NA	NA	-0.5%

(NAVs as on Sept 6, 2002. Returns over 1-Yr are compounded annualised)

Are we suggesting that the midcap trend could go the way of other trends in the past? No. What we are trying to suggest is that you don't invest in a trend. You invest in a mutual fund primarily because it satisfies your investment objective and suits your investment profile. You don't invest in a fund because everyone else around you is doing it and certainly not because your neighbourhood fund distributor is peddling it to you with an incentive. (Incidentally, incentives have been banned by SEBI for this very reason and the role of the distributor and the incentive in fuelling many a trend in the past cannot be undermined).

Now let us discuss a little on what a midcap fund does and how it may affect you. Midcap funds invest in midcap stocks in BSE100/BSE200/S&PCNX 500. These stocks have witnessed a robust 12 months and equity funds holding these stocks have duplicated the success. So much so that we have seen Reliance Vision Fund, a nondescript fund for most of its history, jump into the spotlight and occupy the second ranking in equity funds globally!

That was the good news. Now for something that should make investors sit up and read the fine print. Midcaps are under-exposed and under-researched, compared to large caps. There is very little that analysts know about them largely because most of the attention has been hogged by the large caps. To that extent they are an unknown entity. The S&PCNX 500 is a very large field and if there are stocks that can make money for you, there could well be stocks that could lose money for you. The bottomline is an investor would be delving into something that has considerable risk. At a time when even well-researched large caps have been throwing up surprises (unpleasant ones) in terms of performances and earnings guidance, what can one say about not-so-well-researched midcaps?

Add to this the fact that we are seeing some very disturbing times as far as corporate performances go. Corporates under considerable pressure to show earnings growth quarter on quarter have done their bit (which is quite a bit) to spruce up their accounts with a little help from the auditors. This has become something of an epidemic in the US and with similar revelations about Modi Xerox and Tata Finance, slowly but surely we have imported another trend from US. If known corporates can go this far, how far will relatively unknown corporates go?

What we are trying to highlight is that risk to the investor has increased considerably over the last few years. And while this risk is all-pervading and affects large caps for sure, there is every reason to believe that it may affect even the midcaps equally, if not more.

Does this mean that midcap funds are wrong per se or mutual funds have no business launching midcap funds? The answer is negative on both counts. A fund house will launch a fund if they see an opportunity. You, the investor must invest in the fund if it suits your risk/return profile. In other words, be selfish (what's in it for me) where an investment is concerned and ask a lot of questions to yourself and your distributor about how the fund can help you attain your investment objective.

Midcaps have an above-average risk profile and are ideally suited for the investor who has already invested in a large cap diversified equity fund. After that, if you would like to take on an additional quantum of risk with the promise of a higher reward, you can invest a smaller amount (relative to your entire investment in equities) in a midcap fund. But if you are investing in a midcap fund as your first venture in equities, that does not seem like a very bright thing to do.

So don't let a trend grab your attention. At all times and under all trends, the basic investment rationale is the same. Invest in a fund that best suits your profile and measures up to your needs and don't worry about the latest fad to hit the industry.

 

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