The Hindu Business Line : HSBC Midcap Equity Fund: Hold

INVESTORS can hold the HSBC Midcap Equity Fund in the light of its focussed portfolio and good performance. The fund has comfortably outpaced its benchmark in the eight months since launch, with a 41 per cent return. In terms of returns, it has also bettered all the other mid-cap funds, including the Franklin India Prima Fund in the time-frame since its launch.

Given the fund's limited track record, fresh investments are not recommended at this juncture. However, the performance so far shows promise and the fund could turn out to be a good addition to your portfolio.

HSBC Midcap is one of the most focused funds in the midcap space, going by its portfolio composition. The stocks fall strictly in the market cap band of Rs 200-3,000 crore. As of October 2005, the average stock in this fund's portfolio carried a market-cap of Rs 1,000 crore, much lower than funds such as the Franklin India Prima or even Sundaram Select Midcap.

This is a differentiator because most other midcap funds allocate a portion of their portfolio to large-cap stocks (Rs 3,000-7,000 crore market cap) to bolster either their liquidity or returns. Because of a rigid adherence to its mandate, the HSBC Midcap fund could deliver returns that closely capture the fortunes of midcap companies.

The stringent midcap bias makes HSBC Midcap's performance so far all the more impressive. Between May 19 — the date the fund commenced operations — and now, mid-cap stocks have trailed large-caps considerably in investment returns. While the BSE Sensex sports returns of about 36 per cent over this period, the BSE Midcap index lags it with a 30 per cent return. However, the HSBC Midcap Fund has comfortably stayed ahead of both these indices, with a 41 per cent return. The fund's returns compare favourably to funds such as Franklin India Prima and Sundaram Midcap, which have an established track record in the mid-cap fund space.

However, eight months is a short time-frame over which to judge fund performance. This period does not even comprise a complete cycle, and the fund's ability to handle a sharp downturn or corrective phase is yet to be tested. Therefore, investors may hold off fresh investments in the fund for now.

The portfolio is well diversified across sectors. Mid-sized software firms, sugar and steel were the key sector choices in October, each accounting for no more than 10 per cent of the portfolio. The fund usually holds 30-40 stocks; taking fairly focussed bets in the top 10 stocks, which accounted for 40 per cent of assets as of October.

The fund placed a cap of Rs 700 crore on the collections made during its initial offer period. However, subsequently, the fund size has remained well within this cap. At present, HSBC Midcap manages about Rs 360 crore in assets making it a relatively small fund with a manoeuvrable portfolio.

: HSBC Midcap Fund was launched in May 2005. The fund defines midcap stocks as those with a market capitalisation amounting to 0.1 per cent or less of the BSE-200 basket.

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