Who doesn’t know about the HDFC Mid cap Opportunities fund? HDFC MF One of the stable star funds.
The fund began operating in July 2007, at about the height of the last bull market. Current fund managers are Chirag Setalvad and Rakesh Vyas.
The fund seems to be doing really well. The fund’s regular plans boast point-to-point returns of 28.63%, 20.95%, 26.26% and 17.82% over 1, 3, 5 and 10 years respectively. (See image below)
Compared to its benchmark, the Nifty Free Float Midcap 100, it performs 28.32%, 16.91%, 19.25%, and 11.49% in the corresponding periods. Benchmark performance does not include dividends.
Even the regular plan’s expense ratio is one of the lowest that most of its peers charge.
Without a doubt, it was a string of impressive performances.
Yet, every time an investor asks me for advice about this fund, I say no.
why? where is the problem?
sauce: Unovest. Data as of July 2, 2017. All regular plans.
There is one big problem.
The AUM of this fund is currently Rs. 16,605 kroner. Based on AUM size, the following funds in the mid-cap category are less than Rs. 6,000 crore.
Considering its impressive past performance, brand HDFC, and the fact that most investors rely solely on past performance to make investment decisions, the scale is only going to get bigger.
Be aware that large sizes can be an Achilles heel for mid-cap funds.
As you know, at 100% total stock market size, for example, about 80-85% of market capitalization is contributed by large cap companies. About 15% is from medium-sized companies and the rest is from small and medium-sized enterprises.
With such a limited market size for the mid-cap space, a fund like the HDFC Mid-Cap Opportunity would have trouble finding investments at that size.chance“Sooner or later.
In my view, funds face two distinct options.
Option 1 – Go ahead, play Warren Buffett style and buy the complete business and have it delivered. Unfortunately SEBI regulations do not allow you to do so.
Option 2 – Convert to flexi-cap/multi-cap funds and change benchmarks to broader market indices such as the Nifty 500 to break the chain and seize opportunities across markets.
The second option seems more likely. And the fund has priority to refer and follow.
The ICICI Pru Value Discovery Fund has done the same. This value discovery fund started as a mid-cap fund in August 2004, but was forced to convert to a multi-cap fund in 2015. ).
wait a minute! Converting to a multi-cap fund reduces returns Compare with mid-cap avatar. After all, mid-caps are expected to have higher risk-reward ratios.
there will be yet another problem If an HDFC Mid-Cap Opportunity Fund is converted to a Multi-Cap Fund.
HDFC MF already owns a flagship fund in the same category, HDFC Equity. How can you make your own fund compete with another of the well-known funds? Double dilemma!
looking forward to it What is the HDFC Mutual Fund going to do With its huge size HDFC Mid cap Opportunities Fund.
- You end up growing it to acquire larger, but often less liquid, stakes in smaller companies.
- Convert it into a multi-cap fund and market it against your own flagship fund. Yes, let’s have healthy competition.
actually, third option is also available. Your ideal choice!
Close HDFC Mid Cap Opportunities Fund and buy new subscriptions.
Come on, HDFC MF, you can. Another chance to prove you’re a leader. Having the best interests of the investor in mind, rather than just being there for AUM.
Oh! Are you expecting too much? looks like
How can the fundhouse stop the flow of AUM? It’s like taking off the oxygen mask. Parrot! That is the fund management business. That’s what gives the fundhouse glory. And of course, more AUM means more fees.
Well, HDFC MF makes its own call.
I’m more interested in what you’re trying to do as an investor. What would you vote for if the fundhouse asked you?
Please share your opinion in the comment box.
read more: The Big Bad World of Mutual Funds