If you are a long-term investor, adding midcap funds to your portfolio will drive overall returns. And in such mid-cap exposure, many of you could simply want funds that can deliver returns that are at least better than the mid-cap index, not collapse during market declines, and not be aggressive enough to require smaller allocations and a high risk appetite.
DSP Midcap fits this requirement. DSP Midcap suits any investor with a minimum timeframe of at least 5 years. The fund forms part of our Prime Funds list and finds a place in one of our long-term Prime Portfolios as well. If you have a very high risk appetite, then you might want to combine this midcap fund with more aggressive midcap funds to form the mid-cap exposure. Of course, given that it is a midcap fund, avoid going overboard on allocation to this fund.
Delivers above average returns
In the mid-cap space, there has always been a churn in the list of consistent performers. Midcap funds seldom manage to hold fort. If that is a given, there is also a more recent development of mid-cap funds increasingly struggling to beat the Nifty Midcap 100 consistently.
DSP Midcap is among the few that are the more consistent performers. The fund has not always ranked at the top. But it has always been better than the average in the midcap category in the longer term. Rolling 3-year returns over a six-year period has the fund beating the category average all the time, a record that’s matched only by Kotak Emerging Equity.
Against the Nifty Midcap 100 and the stiffer Nifty Midcap 150, too, the fund holds a reasonable consistency record. It has not always been able to beat the index; rolling 1-year returns since 2015 has the fund beating the Nifty Midcap 150 about 67% of the time and the Nifty Midcap 100 78% of the time.
But towards the end of 2018 and onwards, its performance has considerably picked up to the point where the fund’s 1-year returns were anywhere between 5 and 15 percentage points above the Nifty Midcap 100. The fund’s 3-year returns too are well above the index.
Contains downsides better than other midcap funds
DSP Midcap’s ability to stay above the category average, as well as the strong recent performance is thanks in part to its ability to contain downside better than the benchmark and peers.
For example, the average 1-year loss that DSP Midcap suffered since 2015 was 7.5%. For the Nifty Midcap 150, the average loss was 10.3%. On a 3-year basis since 2015, the fund had 52 instances of losses. The Nifty Midcap 150 had close to double the number of instances. Using the downside capture ratio, which measures the proportion of a fund’s loss to the index’s loss, DSP Midcap scores well above peers. It is next only to Axis Midcap (which takes large cash calls) in downside capture.
When it comes to participating on market rallies, though, DSP Midcap is not the best. Other midcap funds such as Kotak Emerging and Invesco Midcap score better here, but then they are also comparatively more aggressive due to the small-cap exposure. However, DSP Midcap still beats the Nifty Midcap 150 on market upswings – it just does not outshine the index by a large margin like many peers do.
But the strong downside containment and the reasonable upside capture allows it to clock a satisfactory consistent record. It also makes the fund suitable for most long-term portfolios. Its volatility and risk-adjusted returns are better than peers. DSP Midcap does not dip much into the small-cap segment and remains focused only on the mid-cap space.
Picks fundamentally sound companies
DSP Midcap holds a diffused portfolio, which most midcap funds do. Its top 10 stocks account for less than 40% of its portfolio and individual allocations are not high.
DSP Midcap looks for quality companies that have clocked steady and strong growth in revenues, earnings, and profitability as well as delivered superior return on equity, generate good cash flows, and have a strong management. Of course, this also more or less means that the fund will hold stocks with high valuations. But in the mid-cap space, given that quality can be harder to find and is actually desirable, higher valuations is not too much of a risk.
In any case, the fund does book profits in stocks that have rallied sharply. Over the past few months, for example, the fund booked profits in stocks such as Divis Labs and Alkem Labs. Earlier this year, it exited stocks such as Apollo Tyres, Aarti Industries and Bayer Crop Science.
But for the most part, DSP Midcap largely follows a buy-and-hold strategy, which is natural given the metrics it looks for in companies and the nature of the companies. Its portfolio churn is below the category average, even excluding the funds with extremely high churns. Of its current portfolio, over half have been part of the portfolio for at least two years, though allocations of course have changed. The pharma sector holds a big portfolio share, as does industrial and capital goods stocks.
Over the past few months, the fund has bought into stocks such as AIA Engineering, Bharat Forge, SRF, Finolex Industries, Sterlite Technologies, and so on. Financials are another big allocation, with the fund upping share in banks and financials through stocks such as Cholamandalam Investment, SBI Life Insurance, and City Union Bank. Offsetting the cyclical exposure is consumer stocks, with those such as Sheela Foam, Bata India, Jubilant FoodWorks and so on. The fund’s portfolio, therefore, is balanced across segments.
DSP Midcap’s fund size makes it the second-largest midcap fund after HDFC Midcap Opportunities. But the size is still manageable at Rs 7,883 crore compared to the HDFC fund’s Rs 22,125 crore. The fund’s portfolio liquidity is similar to smaller-sized peers; the time taken to theoretically sell its entire portfolio has been less than 20 days even during the March market rout. The fund’s managers are Vinit Sambre, Resham Jain, and Jay Kothari.
Here’s a list of all the top mid cap mutual funds
Also Read : A Nifty MidCap Index Fund that challenges the Index.