Canara Robeco Mid-cap Fund NFO: Should you invest?

After launching the Canara Robeco Banking & PSU Debt fund, the fund house has unveiled its second new fund offer (NFO) this year — the Canara Robeco Mid Cap Fund (CRMF). The NFO opened on 11 November 2022. Should you consider investing in it?

What is on offer?

The investment objective of the CRMF is to generate capital appreciation by investing in mid-cap companies. The scheme will allocate at least 65 percent of the money to shares of mid-cap firms ranked between 101-250 by market capitalisation on the BSE. The fund will be managed by Ajay Khandelwal and Shridatta Bhandwaldar. The scheme will be benchmarked against the S&P BSE 150 Mid Cap Index TRI.

What works?

The core of the mid-cap portfolio of the scheme will house high-growth leaders across sectors that are expected to benefit from domestic economic growth. The fund managers will also allocate monies to companies that have been consistently compounding their earnings and are expected to continue doing so. The third component of the mid-cap portfolio will include cyclical stocks that showcase improved cash flows, increased return on capital from business turnaround, or industry cycle revival.

“Investing in mid-cap stocks of market leaders, 75 percent of whom are dependent on domestic factors, have been rewarding for investors,’’ says Shridatta Bhandwaldar, Head-Equities, Canara Robeco AMC.

The fund managers intend to build a diversified portfolio with no single stock position in excess of four percent, to begin with.

Mid-cap funds have done well over long periods of time. Over the last five and ten year periods ended November 14, 2022, the mid-cap fund category has generated 11.95 percent and 17.75 percent returns, respectively, per Value Research data.

Investing in mid-cap stocks gives an exposure to emerging high-growth sectors, with returns higher than what may be possible with large-cap stocks. These include quick service restaurants, diagnostics firms, capital goods, retail, and transportation.

What does not work?

Mid-cap stocks are volatile in nature and may work for investors with a high risk appetite. They can be unnerving in the short-run, especially in turbulent times.

But Bhandwaldar points out that long-term investors tend to ride out volatile phases. “Going by past data, in only 2 percent of the five year rolling return observations for the last 10 year period ending September 2022, have investors seen negative returns in the mid-cap index,” he adds.

Shyam Sekhar, Chief Ideator, iThought Advisory says, “The valuations of mid-cap stocks have run up a lot and if valuations contract, then the investor may be caught on the wrong foot. Mid-cap funds have a universe of 150 stocks only. Given the restrictive mandate of mid-cap funds, an investor is better off with a flexi-cap or a multi-cap fund if he is keen on mid-cap exposure.”

The Nifty Midcap 150 Index quoted at a PE multiple of 25.88, whereas the Nifty 100 Index quoted at 22.52 as on 14 November 2022.

“Valuation is not a big challenge for an investor with a three-five year timeframe,” Bhandwaldar added.

What should you do?

Canara Robeco Mutual Fund has been selective about launching new funds. Its recent launches of equity funds — the Canara Robeco Value Fund and the Canara Robeco Focused Equity Fund, have delivered decent returns for investors so far.

Prior to the re-categorisation of the scheme in 2018, the fund house had a fund called the Canara Robeco Emerging Equities Fund, which predominantly invested in mid-cap stocks. This was later brought under the large- and mid-cap category.

“The equity team at Canara Robeco AMC has demonstrated good stock-picking skills so far. Despite some exits from its investment management team, the fund house’s performance has been good, which speaks volumes about the high quality of the portfolios and the investment process. Investors with a long-term horizon can invest in the NFO and allocate money afterwards through a systematic investment plan as part of their core equity portfolio,” says Ravi Kumar TV, Founder of Gaining Ground Investment Services.

Investments in mid-cap funds can create wealth over the long term despite volatility in the short term. However, investors should avoid investing in CRMF till it builds a track record.