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Aarati Krishnan

INVESTORS who would like to buy a fund with a strong mid-cap focus and are comfortable with an above-average risk profile, may consider investing in the HDFC Capital Builder Fund through the systematic investment route. The fund has, since its rejig in 2003, delivered strong returns by investing in the universe of mid-cap and small cap stocks.

With a three-year compounded annual return of about 49 per cent and a one-year return of about 45 per cent, the fund's returns compare well with those of competing products with a bias towards mid-cap stocks.

The fund practices the principle of value investing, and attempts to identify stocks that are trading at a discount to their intrinsic value. Under-valuation is determined by comparing parameters such as a stock's price-earnings ratio, the price-to-book value ratio and similar measures to its industry peers.

An analysis of the fund' portfolio over the past year shows that the fund's stock choices have been unconventional and have spanned a wide range of sectors. Some of the stocks that feature in the portfolio come with low levels of liquidity. After a sharp spike in fund size since November 2004, the fund is at about Rs 760 crore, a large size for a mid-/small-cap focussed fund. With the proportion of mid- and even small-cap stocks in the portfolio on the rise, the fund seems to carry a higher risk profile than the ordinary large-cap fund.

However, a couple of features of the fund's investment strategy could help reduce these risks. For one, the fund adopts a very diversified profile. It has generally restricted its individual stock holdings to less than 6 per cent of its NAV. The portfolio features a large number of holdings that amount to less than 2 per cent each in the NAV.

Its sectoral allocations are also splintered with no single sector usually accounting for over 10 per cent of the NAV. These measures reduces the fund's dependence on each of its stock calls and also mitigates the impact costs that would be associated with building up or liquidating positions in some of the less liquid small or mid cap stocks.

Second, the fund's portfolio churn is also low in comparison to other HDFC Funds such as HDFC Equity and Top 200 Fund. This suggests that it stays with each of its stock choices for a considerable period.

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