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S. Vaidya Nathan

UNITHOLDERS in Sundaram Select Mid-Cap Fund could retain their holdings as there could be upside potential. The recent bullish phase in mid-cap stocks has pepped up performance.

It has been one of the superior performers during the April-September quarter. And several mid-cap and small-cap stocks have room for further appreciation.

Our recommendation is tempered by the aggressive and momentum-based approach that appears to dominate the fund's strategy. Among funds in the mid-cap space, HDFC TaxPlan 2000 and Franklin Prima — despite the latter's comparatively indifferent performance in recent months — are our preferred options, especially for investors initiating exposures in this segment.

Since its launch two-and-half years ago, Sundaram Select Mid-Cap Fund has outperformed the CNX Mid-Cap 200 by about 3 percentage points. This appears modest for an aggressively managed fund, especially as there have been at least four bouts of re-rating of mid-cap stocks since July 2002. Over the past year, the degree of outperformance has been larger. If this pace were maintained, the long-term track record would present a better picture.

Suitability: Several mid-cap and small-cap stocks suffer from poor liquidity and this leads to sharp price-swings. The risks associated with such stocks are high. This is true for the fund, too. It has, however, delivered returns that compensate for the higher risk element.

Investors could opt for the dividend option due to superior tax efficiency as dividend is exempt from tax.

Portfolio overview: The fund has a diversified portfolio with exposures to individual stocks pegged at less than 4 per cent. It had a sizeable cash equivalent of 28 per cent of its assets at the end of August. This should provide a boost as the fund would have been well placed to capitalise on the rally in mid-cap stocks over the past couple of months.

The top ten holdings account for just 30 per cent of the assets. As a result, the fund would require most of its holdings to do well for it to sustain its performance.

It has churned its portfolio aggressively, and well, so far. The chemical and engineering sectors are the preferred plays.

: Sundaram Select Mid-Cap was launched in July 2002. The minimum investment amount is Rs 5,000. The entry load is 2 per cent. There is no exit load.<137>

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