This 22-year-old fund house is making 2nd attempt to build a midcap track-record. Should you invest in its NFO?

IDFC Mutual Fund’s (IDFC MF) midcap fund will open for subscription today (July 28). But why is a 22-year old fund house launching such a basic category scheme so long in its life cycle?

The scheme

Like any other midcap fund, IDFC Midcap Fund will invest at least 65 percent in midcap stocks. In fact, the fund house says that it would go a step ahead and invest in the range of 75-80 percent in midcaps.

This is not the fund house’s first tryst with a midcap-focused fund. Earlier, IDFC Premier Equity Fund was run like a mid-cap fund. Kenneth Andrade, its earlier chief investment officer used to manage it. Andrade left the fund house in 2015. He now manages Old Bridge Capital PMS, which he launched in 2015.

But IDFC Premier Equity Fund was different than many other mid-cap funds at the time. It used to invest in companies in their early stages of business cycles and used to typically hold on to them for long periods of time. In some cases, even if they had become almost large-caps. Besides it used to invest about 20 percent in large-cap scrips and about 10 percent in cash. The fund had been a star -performer for long period of time and had catapulted Andrade to a star fund manager status in those days, barring the brief underperformance periods.

After Andrade left IDFC MF, Anoop Bhaskar, the former head of equities at UTI MF took over and changes were made in the way schemes were managed at IDFC MF.

After SEBI’s re-categorisation exercise in 2018, the Premier Equity Fund was moved into multicap category and later in flexicap category, after the new category was created in 2020.

Further, IDFC Sterling Value, now part of the Value Fund category, was run with mid- and small-cap focus. The fund has a challenging past. Somewhere in its life cycle, IDFC MF changed its style slightly to include large-caps up to around 40 percent of the scheme’s portfolio. After SEBI’s re-categorisation, the fund became a value fund.

In other words, IDFC MF had schemes that were run with mid-cap strategies, but somewhere in their course, they drifted their paths to include other kind of stocks too. That left the fund house without a pure mid-cap fund. This void now gets filled by IDFC Midcap fund, which gets launched today.

What works

Sachin Relekar, senior fund manager, IDFC MF, says that the midcap fund is being positioned as a fund to complement largecap and flexicap funds.

“Most investors’ portfolios are dominated by largecap and flexicap funds. The sector allocation in these categories are largely in financials, oil & gas, IT services, consumer staples, etc,” Relekar points out.

Although regulations allow flexicap funds to invest between large-, mid- and smallcap stocks without any limits, flexicap strategies have historically shown bias towards large cap stocks.

“Companies belonging to smaller sectors are present in the midcap space. So, there is a wider universe of stocks, as well as wider range of sectors to choose from for a midcap fund,” he adds.

The IDFC Midcap Fund will look for midcap companies with high management quality, scalable business model and strong competitive positioning.

Ravi Kumar TV, founder of Gaining Ground Investment Services, says, “This new fund offer may have come at the right time as most fund managers have started to build a constructive view on the markets as the valuations appear attractive.”

The Nifty Midcap 100 Index, which is seen as a benchmark for midcap space, is trading at a slight discount to its long-term average valuations.

What doesn’t

Fund managers say markets continue to face the risk of Crude Oil prices rising again, or interest rates rising higher than market expectations.

The stock markets have seen a downward trend in first half of 2022. The frontline market index S&P BSE Sensex had corrected 10 percent by June-end, while the S&P BSE Midcap Index had corrected as much as 14 percent by then.

Midcaps can go through periods of higher volatility during difficult periods.

IDFC Midcap Fund aims to maintain higher exposure to midcaps than the minimum regulatory requirement of 65 percent, which can exacerbate volatility during such periods.

On the other hand, a higher exposure to midcaps can offer higher potential returns in the longer-term, while ensuring investors get a mid-cap-focused fund to diversify their portfolio.

Moneycontrol’s take

A mid-cap fund’s success depends upon the stock-picking ability of the fund manager. While IDFC MF has a well-established investment process in place, one can wait for the fund to build a track-record before considering it for investing. The new fund offer (NFO) closes on August 11.